5 Groupon Challenges
Groupon, the dominant player in the group coupon industry, just filed for a $750 million IPO roughly six months after turning down a $6 billion purchase offer from Google last December. As the first mover in this market, Groupon gets one fifth of its traffic from direct referrals due to top-of-mind association, according to Compete.
Groupon and the Deal-a-Day market
The group buying industry is projected to increase by 138% to $2.66 billion in 2011, based on research by Local Offer Network. While more than 63,000 deals were published in 2010, roughly two-thirds of that amount or 39,000 deals were projected to be published in 1Q 2011. Further, BIA Kelsey predicts that the Deal-a-Day market will grow to $3.9 billion by 2015.
Amazon acquired Groupon’s nearest competitor, Living Social, in December 2010. Based on Compete data, Living Social’s subscriber base increased 140% in the last quarter. Its traffic peaked after its successful January, 2011, Amazon offer. The market is definitely heating up and consumers shop for the best deal. Groupon is of Living Social’s fifth biggest source of traffic and less than 10% of Living Social’s traffic is direct, according to Compete.
5 Groupon challenges
From a longer term marketing perspective, there are five significant challenges to Groupon’s group buying model.
- Easy-to-imitate model. While Groupon has first mover advantage in the group buying market and related top-of-mind recognition, the potential for companies with large installed bases and an email list to enter the market is high. Facebook recently launched a deals model. Many of these offers are locally based opening the field for a wide range of potential competitors, specifically local newspapers, radio stations, broadcasters and penny savers. These potential competitors know the market, have existing sales teams and relationships, and are looking for ways to expand their revenues.
- Niche players. Additionally, Groupon has current and potential competition from targeted players. While Groupon recently announced a partnership with Expedia for the travel vertical, other niches are available.
- Lifetime subscriber value. The fact that Living Social’s Amazon deal didn’t translate to longer-term subscription increases is worrisome for the market. It means customers selectively registered, bought and left. Their shopping behavior occurred on other social media platforms. For Groupon investors, this should be a big red flag since one of the three top accounting metrics is adjusted consolidated segment operating income, a term that wasn’t in my accounting text. The adjusted CSOI, as Groupon affectionately calls it, is “online marketing expense, acquisition-related costs and stock-based compensation expense.” Traditional direct marketers should be aghast because Groupon isn’t tracking the cost of building its customer file, a critical element of lifetime value calculation. (For more details on Groupon’s financials, please check out Eric Savitz’s Groupon’s Bubble 1.0 Approach to Accounting.)
- Limited loyalty. The big issue is whether Groupon deals make sense for marketers. For the retailers offering group discounts, there appears to be no long term sticking power. Beware that, as research from Rice University found, one out of three deals wasn’t profitable. What happens when the novelty wears off? (Before you decide to use one of these group coupon services, read Groupon’s Cost: Can You Afford a Free Lunch?)
- Price. As the data from Compete underscores, consumers will and do shop for the best deal. This is why Groupon is the fifth largest source of Living Social’s traffic. If customers are in a deal seeking mode, you better believe that they’ll take the extra time to check out all of the deals. From a retailer’s perspective, especially if you’re a small player, do you have the margin and desire to compete on price?
I appreciate that the deal-a-day model is great for consumers who selectively buy product for less or for services that are a treat that they’ll never use again. But, as a marketer –show me the money. Where’s the long-term value of these customer for retailers who are potentially hurting their margins and their brands?
If you’ve used a Groupon or similar service, particularly as a merchant or marketer, please share your experience.
As background, here are some related columns on Groupon.
- 5 Ways Groupon Can Make You Money – Suggestions for maximizing your Groupon usage
- Doing the Math on a Groupon Deal? via New York Times – shows how to do the step by step math. A must read for small businesses.
Photo credit: Lomo-Cam via Flickr