Brands in the News

Groupon’s Problem

18 Oct 2011  

Groupon is gearing up for an IPO. My advice to the team planning the offering is quite simple: move quickly.

Andrew Ross Sorkin has as an interesting article on Groupon in today’s New York Times. He notes that Groupon has a number of rather significant issues, including a fairly low cash balance and a working capital deficit.

I think Groupon has perhaps a more fundamental problem: its current model isn’t likely to produce sustainable growth.

Groupon connects customers and companies. Customers come to Groupon looking for deals and companies come to Groupon offering deals. Groupon connects the two groups and pockets a rather large portion of the revenue.

On the surface this seems like a win-win-win situation.

But it isn’t.

The problem is that customers and companies actually want different things. Customers want great deals on brands they love: Whole Foods, Starbucks and the funky new restaurant down the street. Companies want to offer deals on new products and fading brands. Someone with a popular brand doesn’t need to offer a Groupon.

To date, Groupon has grown in part because companies are experimenting, seeing how the Groupon system actually works. I suspect this is why Whole Foods offered a deal on Living Social and why Gap offered a deal on Groupon.

As companies learn how Groupon works they will become more selective.

When Groupon primarily offers deals on new brands people haven’t heard of and brands that are clearly fading, customers will move on to other things.

This trend might already be developing; Groupon only grew revenue by 13 percent in August.

To have any chance of getting a high valuation Groupon should get its IPO done ASAP.

1 Response

  1. I couldn’t agree more with you on the article. I have already a lot of negative experiences with companies who had deals on groupon: not only that those customers rarely returned (to e.g. restaurants as guests), but they have often brought negative publicity to those restaurants and often repelled the existing clients. As you have also said, well known brand does not need giving away for free on Groupon.

    On another side, from my personal observations, in last year we could witness worse offer on Groupon. Nowadays, only no-name brands are offering deals under suspicious conditions (‘buy 13, get 14th for free’ kind of deals), which is also rarely bringing value to end customer.

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