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

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