Observations on Groupon’s business model – a primer Christian Dahlen May 2012 With updated remarks on economic characteristics and competitive landscapewww.linkedin.com/pub/christian-dahlen/1/447/4b3
Content of this document• Business model, revenues and cost• Economic characteristics• Customers• Merchants• Competitive landscape
GROUPON BUSINESS MODELCustomer signs with Groupon Deal reaches critical mass Customers pay Groupon Groupon Customer features redeems deal coupon at Merchant Groupon pays merchant Groupon decides signs up which deals are merchant share featured in a ZIP code area Payments spread out in 3 installments over lifecycle of deal, leading Groupon with negative working capital
local GROUPON REVENUE MODEL US GAP, Body # of geographies national Shop international # of deals x Long waiting list of Main deal merchants waiting Categories/ to be featured Side deals geography New experimental Groupon stores featureGrouponnet x Gross/ Listrevenue price Function of category; Discounted deal seems to have price x increased. Push into travel and hotels Net deal size x Discount to customers (%) Share to Groupon (%) Typically ~ 50%. May trend 30-50% downwards due to competitive pressure
KEY LEVERS TO IMPROVE COST STRUCTURE END CUSTOMERS MERCHANTS 2011 marketing 2011 SG&A cost: cost: 47% of 50% of revenue revenue• Reduce cost of customer • Less favorable merchant terms acquisition – already dropping rapidly • Reduce cost structure of merchant renewals• Increase purchasing frequency and repeat buys • Retention – achieve lock-in through better post deal support• Activate dormant customers who have not • Enter into national deals with purchased lower cost structure/higher margins
ECONOMIC CHARACTERISTICS• High cost of customer and merchant acquisition• Lack of network effect – each city has to be won separately • Economies of scale (‘winner takes• No technology barriers to entry – most’) –Groupon and LivingSocial have evidenced by the large number of been the only start-ups able to raise entrants in 2010 the massive amounts of capital• Low switching cost for merchants and required for customer and merchant customers – many have tried many acquisition providers • Brand recognition• Scaling is expensive - sales people on the ground to educate merchants
Customer benefits Customer demographics• Deep discounts • Early adopters: Highly affluent with• Discover new services and disposable income merchandise • ‘ Urban females’ • 18-34 yrs
DEAL PROPOSITION FOR MERCHANTS Guaranteed revenues Large number of new customers
MERCHANT ECONOMICS Best Suited Businesses• Revenue retention: 50% of the deal minus credit card fees • High fixed cost businesses• Redemption rate: ~80% • High customer acquisition cost• Incremental spending: Gap • Repeat purchases Groupon value of $50 likely to • Rice University study: convert into of $75 to $100 once • 66% of deals successful customer is in the store • Examples: lifestyle• Repeat business: 22% repeat businesses, e.g. spas (82% customers successful), sailing, restaurants (58% successful), education
MERCHANT PERSPECTIVE ON CUSTOMER INTERACTION Respond to Get customer to follow on Merchant Like it on Offer on Advertise on
ISSUES FACING MERCHANTS Learning curve in structuring a deal • Too many responses • Too many discount shoppers Long waiting times to be featured • Redemption over life time Switch to other daily deal providers?
CURRENT COMPETITORS PAST COMPETITORS Trials in a few cities Only full-size competitor but terminated after less distant second; ~1/3 size than one year Hedging strategy; bought aggregator 3rd largest player sold to Gilt City Dealmap and Dailydeal.de Owns significant stake in LivingSocial 2011 saw a massive consolidation - daily deal sites were either being sold/acquired or simply shut down
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