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Groupon business model

Short primer explains Groupon's business model and sources of revenue, key customer demographics and strategic challenges.

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Observations on Groupon’s
                   business model – a primer
                                                  Christian Dahlen
                                                     May 2012
                        With updated remarks on economic characteristics and competitive landscape




www.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 MODEL




Customer 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                    feature
Groupon
net       x                                              Gross/ List
revenue                                                  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
Ad

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Groupon business model

  • 1. Observations on Groupon’s business model – a primer Christian Dahlen May 2012 With updated remarks on economic characteristics and competitive landscape www.linkedin.com/pub/christian-dahlen/1/447/4b3
  • 2. Content of this document • Business model, revenues and cost • Economic characteristics • Customers • Merchants • Competitive landscape
  • 3. GROUPON BUSINESS MODEL Customer 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
  • 4. 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 feature Groupon net x Gross/ List revenue 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
  • 5. 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
  • 6. 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
  • 7. Customer benefits Customer demographics • Deep discounts • Early adopters: Highly affluent with • Discover new services and disposable income merchandise • ‘ Urban females’ • 18-34 yrs
  • 8. DEAL PROPOSITION FOR MERCHANTS Guaranteed revenues Large number of new customers
  • 9. 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
  • 10. MERCHANT PERSPECTIVE ON CUSTOMER INTERACTION Respond to Get customer to follow on Merchant Like it on Offer on Advertise on
  • 11. 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?
  • 12. 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

Editor's Notes

  1. Notable sources: http://primitus.com/blog/whats-the-secret-success-of-groupon/
  2. Notable sources: http://techcrunch.com/2010/05/02/teardown-groupon/
  3. Groupon S-1 filing and quarterly reports; 2011 unauditedresultsGroupon Q1 results
  4. Notable sources: http://techcrunch.com/2010/10/17/why-groupon-is-no-ebay/
  5. Notable sources: http://www.grouponworks.com/demographicshttp://aimgroup.com/blog/2010/08/20/groupon-goes-niche-with-new-%E2%80%98deal-personalization%E2%80%99/
  6. Notable sources: http://online.wsj.com/article/SB10001424052748703447004575449453225928136.html?KEYWORDS=groupon#printMode#ixzz0yt80rShBhttp://www.retaildoc.com/blog/groupon-worst-marketing-business/http://adage.com/digital/article?article_id=145552
  7. Notable sources: http://online.wsj.com/article/SB10001424052748703447004575449453225928136.html?KEYWORDS=groupon#printMode#ixzz0yt80rShBhttp://www.retaildoc.com/blog/groupon-worst-marketing-business/http://adage.com/digital/article?article_id=145552
  8. Notable sources: http://gigaom.com/2010/09/29/hey-groupon-its-time-for-a-localsocial-roll-up/
  9. Notable sources: http://online.wsj.com/article/SB10001424052748703447004575449453225928136.html?KEYWORDS=groupon#printMode#ixzz0yt80rShBhttp://www.retaildoc.com/blog/groupon-worst-marketing-business/http://adage.com/digital/article?article_id=145552
  10. Notable sources: http://www.evanmiller.org/is-groupon-the-next-google.htmlhttp://www.businessinsider.com/why-yelps-daily-deals-could-be-a-groupon-killer-2010-7http://gigaom.com/2010/10/13/newspapers-need-to-do-more-than-copy-groupon/http://blogs.wsj.com/venturecapital/2010/09/29/rice-university-study-groupon-renewal-rate-not-so-hot/http://allthingsd.com/20120319/amazons-key-to-beating-groupon-in-the-daily-deals-space-is-its-164-million-paying-customers/