Groupon: Now 85% Off!
Groupon's Roller Coaster Journey as Told by a Former Employee
Company and Business Model Overview
Groupon is a fascinating case study of one of the fastest growing companies in the world that is now trading at 85% off its IPO price. Armed with the bold vision of bringing the $3T+ local commerce market to the Internet, Groupon’s business model entails connecting local businesses and local consumers. Its value proposition is simple: for merchants, Groupon can get butts in seats like no other form of advertising (online or offline) can; customers can discover great businesses on Groupon at unbeatable prices. Founded in Chicago, Groupon started by offering just one deal per day per city and drove massive user adoption as users scrambled to invite new users to the platform to secure that day’s deal. However, as Groupon scaled, its operating and business models fell out of alignment.
Operating Model Misalignment
As Groupon outgrew its daily deal roots and aspired to become a marketplace for local commerce, it ran into misalignment on three core dimensions: product, process, and culture.
Product
When Groupon was pushing one deal per day, there was no marketplace element to the product. There was no selection for users to browse (past deals of the day were no longer purchasable) and no focus on personalization since all users received the same deal. In shifting to a marketplace model, Groupon sourced more merchants to the site, personalized a feed of deals for a given user to purchase, and built a search experience. It overindexed on the “Buy” node of the Local Commerce Process flow highlighted in Exhibit 1. Yelp was the leader in “Discover” as it had ample merchant reviews to jumpstart a user’s local commerce journey. Square and Paypal were leaders in the “Redeem” step as they had point-of-sale systems that tapped into merchants’ transactions data. Not thinking through the user flow holistically left Groupon in a difficult position to serve as a one-stop-shop for users.
Another contentious point is the practice of discounting. The very name “Groupon” implies users will receive a discount, and indeed Groupon operates very efficiently in sourcing 40-80% off discounts. However, discounting limits the scale of the marketplace. Good merchants who are doing well don’t need to discount, so Groupon appeals to early-stage or struggling merchants. This offering in turn, attracts price-sensitive customers, setting off a vicious feedback loop (see Exhibit 2 below). Further, discounting has the potential to tarnish the image of high-end brands. Breadth and depth of selection are obviously critical pillars to success in marketplace design, and Groupon as constructed today, largely features 3-star-Yelp-equivalent merchants.
Process
Groupon’s go-to-market strategy involves pushing curated deals to users via email (and now mobile). When Groupon started with just one deal per day per city, push distribution via a single daily email was great as it drove purchases without inconveniencing users too much. As the company moved to its marketplace business model, its old operating process of push distribution was not a great fit. To become a marketplace, Groupon had to supplement its push distribution with pull distribution. It had to source a broad selection of deals with density within a particular geo-locale, build a robust search experience, and train users to consume Groupon in an entirely new fashion. While Groupon recognized this paradigm shift was needed, it proved difficult. As mentioned in the Product section, lack of discovery and limited selection muddled Groupon’s ability to communicate to its users its new battle cry of “Check Groupon First.”
https://www.youtube.com/watch?v=0RLZiB19ZXQ
Exhibit 3: “Check Groupon First” ad campaign (1)
Culture
Headquartered in Chicago, Groupon initially took on a sales and marketing culture. As the company scaled, it built up a strong engineering, product, and design presence, with many of these tech hires joining the new Silicon Valley office. Chicago was proud of its “feet on the street” strategy that brought Groupon much of its early success. It felt building relationships with local merchants who perhaps aren’t the most tech-savvy required a heavy dose of human touch. However, the Palo Alto folks came at problems from different perspectives and looked to automate many processes. For example, in the old days, a function within Sales Operations known as City Planning would hand pick the deals to send out to customers. Technology folks wanted to automate this function and built sophisticated algorithms that leveraged internal data sets and machine learning to get better at learning users’ preferences. Overall, tension between sales and engineering needs to lead to healthy compromise, as overindexing on one or the other leads to misalignment between the business model and operating model.
Sources
- https://www.youtube.com/watch?v=0RLZiB19ZXQ
If you were the top executives of Groupon and can make any decision, what are the things you would change to prevent the plummet of Group-on?
Hey Aldo, thanks for the comment. I see four keys to good marketplace design: selection, price, information, and convenience. If Groupon does the stuff above, I think they’ll be in good shape.
1) Core Product
a) Acquire more merchants (including more high quality merchants)
b) Invest in user reviews and publish on site
c) Remove awkwardness in redeeming a Groupon
d) Build compelling search experience and pull distribution channel
2) International business: Improve efficiency of operations and restore profitability
3) Future Product: Invest in beacons and POS technology to tap into merchant transactions data.
It seems to me that Groupon’s business model is nearly impossible to scale because of the reasons you identified (poor performing merchants subscribe, price sensitive customers buy). Did the founders have a different vision for the scaling of the business when they founded it or did they originally have limited scale in mind?
Dallin, thanks for the great question! I think the founders didn’t really anticipate how radically different a scaled-up Groupon would be from baby-Groupon. Groupon grew so quickly as a company and went public so early, it was hard to really think through how the marketplace vision would work. I don’t think they wanted to be limited in scale, but I think they thought they could transition to the marketplace later. They underestimated the difficulty of building out pull distribution and overestimated how much time they could rely on email as a channel. I still think Groupon can make the marketplace vision happen. I see four keys to good marketplace design: selection, price, information, and convenience. Groupon needs to invest in user reviews, acquire more merchants, drop the 40-80% discounts to more reasonable or perhaps even 0% discounts for the good merchants, and remove the awkwardness around redeeming a Groupon.
Nice job! Seems like the “check groupon first” mentality is actually one of the worst outcomes for merchants; as you mentioned, yelp already owned discovery so what consumers were more likely to do with groupon is simply to “check groupon first” to see if Groupon is offering a deal for a place the consumer already wanted to go. I wonder if they could have scaled by sticking with the push marketing approach and actually convincing customers to do something they weren’t previously considering. I imagine even good merchants could benefit from offering off-peak deals through Groupon occasionally.
Russ, thanks for the great comment! Agree with you that there is always some cannibalization risk for merchants with running a Groupon. But, I think the push business has a clear ceiling. Demand generation is naturally a smaller business than demand fulfillment (i.e. there’s only so much you can trick people into buying stuff they didn’t realize they wanted :)) I still think the pull business can pan out for Groupon. They’ll need to lax on the “discount” being a core part of the consumer value proposition. If you imagine an AdWords-esque world where discounts are set by the marketplace, high quality merchants can set discounts just during their off-peak times as you mentioned or even charge a premium for high-demand slots.
As an aside, Groupon has a surprising amount of user review data (especially internationally where the numbers dwarf Yelp’s). They can definitely make a move into “Discover” and steal of some Yelp’s thunder there. Another plus point with Groupon’s reviews is they come from verified redemptions at the merchant, so this eliminates the authenticity problem Yelp sometimes has.
Good luck at Utah tonight!
Makes sense re: the ceiling on push. Also I would not have guessed that Groupon could steal some Yelp thunder, but that makes sense.
Was looking at Groupon for a postgame stone massage deal but think I’ll instead go for midnight rock climbing. Russ never quits. Gotta keep in shape so I can dunk on some dubs later this year.
Hey Rohan! Interesting post with great points about the misalignment of Groupon’s operating and business models. I can relate a lot to your discussion of the push vs. pull strategy- as Groupon changed, it became harder for me to use because there were simply too many deals to scour through for it to be worthwhile. Additionally, I’ve noticed that the deals on Groupon have gotten less and less appealing, likely because they can’t secure the suppliers they ideally would want for brand reasons. Groupon also used to feature a lot more local, one-off brands which made it exciting; that’s less the case now. I wonder whether they can shift their strategy back to what seemed to be working better- is it too late? Has the brand been “tarnished” too much already?
Hey Anjali, thanks for the great comment! I totally agree with you that Groupon lost its local roots as it expanded. My team experimented with going back to some earlier concepts like expiring deal of the day, tipping point, etc., but ultimately as I was saying to TJ in his comment, demand generation is a smaller market than demand fulfillment. Groupon wants to serve whatever local need you might have–be it a restaurant, spa, salon, housecleaners, local concerts, etc. Going back on the marketplace vision would be a no-go in my opinion.
As for the brand, “tarnished” is a little harsh. I think Groupon certainly struggles to attract high-quality merchants to the platform because of brand, first and foremost.
Do you believe this model is sustainable and does not simply cause clients to expect discounts everyday? (aka. if there are always discounts then there never really are any).
Hey David, great question. I think what Groupon ideally strives for is not just sending the right merchants to customers but also sending the right customers to the merchants. The key to this is being able to stratify incoming merchants along their needs: customer acquisition, loyalty, spend/visit growth, and yield management and having the data on customers to know which customers would best align with the merchant’s goal. So, for a brand new merchant who just wants customers at any cost, we blast a high discount, mass-reach groupon. For a successful merchant who simply needs to fill in some slow times, the Groupon would be for smaller discount and restricted times.
Great job, Rohan. Do you think that there is something Groupon could have done as it scaled its business, in order to prevent the spiral into decline?
Hi Rohan, this is a great read! I agree with you 100% about Groupon needing to incorporate user reviews, I flipped back and forth for about an hour between Groupon and Yelp the last time I bought a Groupon for a hair salon in Boston.
Regarding the issue of price-sensitive consumers being drawn to merchants on Groupon, then abandoning them after coupon redemption: did Groupon ever think about scaling by helping local merchants develop their own loyalty programs? Since many merchants mandate that Groupons only be purchased for first-time customers only, perhaps Groupon could offer their platform as a service for local merchants to implement their own rewards programs to lock customers in after the Groupon is redeemed and keep them coming back with some “buy 10 smoothies get the 11th free” or similar.
and hilarious title 🙂