This document discusses daily deals sites like Groupon, the largest player in the industry. It describes how Groupon grew rapidly through acquisition of customers and merchants but struggled with low repeat purchasing. While Groupon had high revenue, it had large operating costs and was not yet profitable. The document considers options for investing £100,000 and risks of entering the crowded daily deals market.

1. GROUPON & THE DAILY
DEALS PHENOMENON
Prepared by Barry Holloway
for students at the University of Kent
November 2011
Monday, 28 January 13

2. A BIT
ABOUT ME
Monday, 28 January 13

3. WHAT IS A DAILY DEALS SITE?
WHICH ONES HAVE YOU HEARD OF?
Monday, 28 January 13

4. GROUPON
IN THE NEWS
IPO earlier this month
Monday, 28 January 13

5. HOW WOULD YOU SPEND
£100,000?
• Buy shares in
Groupon - you get any
increase in value
• Start your own Daily
Deals site - you get
profits / cash if the business
is sold
• Put it in the bank - you
get the interest
Monday, 28 January 13

6. WHAT ARE
DAILY DEALS SITES?
Define the business as the
need it fulfils for:
• merchants
• customers
Monday, 28 January 13

7. WHAT ARE
DAILY DEALS SITES?
Daily deals sites are marketplaces -
bringing merchants and customers
together, enabling:
• merchants to sell excess inventory
and acquire new customers cost
effectively
• customers to save money and
discover new products, services and
brands
Monday, 28 January 13

8. WHY IS GROUPON SO
VALUABLE?
Compare to other online
marketplaces that bring
buyers and sellers together:
• Google
• eBay
Monday, 28 January 13

9. THE GROUPON STORY
• Started as a group activism site (ThePoint.com) in
2007
• Raised $30m in 2009
• Covers 54 cities by April 2010 and has sold 4
million Groupons - raise another $135m (value has
gone up fourfold in three months!)
• May 2010 - buys CityDeal - biggest daily deals
company in Europe
• August 2010 - Gap offer sells 400,000 in one day
• December 2010 - Groupon turns down $6bn offer
from Google and raises another $950m, with
$345m going to directors
• Feb 2011 - runs controversial ad during the
Superbowl
• June 2011 - announces IPO
Source: TechCrunch
Monday, 28 January 13

10. GROUPON HYPE:
PR MASTERCLASS
• Groupon’s growth was
extraordinary
• The PR story was even
better...
Monday, 28 January 13

11. GROUPON CUSTOMER BASE
Cumulative registrants
90,000,000
•A registrant is someone
who has registered, but may 67,500,000
not have bought anything
45,000,000
• The 2011 figure is for the
end of March 22,500,000
0
2009 2010 2011
Source: Groupon IPO prospectus
Monday, 28 January 13

12. BUYERS AND SALES UNITS
Buyers Sales Units
• Only 1 in 5 registrants ever 30,000,000
buy
22,500,000
• Those who do buy more
than once on average 15,000,000
• Groupon makes $10 per
7,500,000
sale in commission =
$270million in Q1 2011 0
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Source: Groupon IPO prospectus
Monday, 28 January 13

13. WHAT’S THE HURRY?
Groupon is spending vast
sums to grow quickly
Why?
Monday, 28 January 13

14. WHAT’S THE HURRY?
The market leader gets the
highest margins...
... and biggest valuation
A copycat could overtake
them
Google and Facebook are a
major threat
Monday, 28 January 13

15. ATTACK OF THE CLONES
There are Groupon clones
all over the world
For example, in the US there
are around 370 copycats
and there are over 1,700 in
Brazil
Why?
Monday, 28 January 13

16. ATTACK OF THE CLONES
• The next big thing - huge
buzz and take-up
• Huge valuations being talked
about
• Easy to copy - low barriers
to entry
Monday, 28 January 13

17. HOW TO BUILD YOUR OWN
GROUPON CLONE
• Choose market location
• Build technology: content-managed
deals platform, customer database, CRM, payment systems,
anti-fraud system, reporting, invoicing, customer support
(or buy off-the-shelf)
• Hire sales team
• Acquire customers
Monday, 28 January 13

18. THE CHICKEN AND EGG
SYNDROME
Having great offers is clearly vital,
but:
• How do you get merchants to give you great deals
when your customer base is tiny?
• How do you get customers to sign up if your offers
are poor?
Monday, 28 January 13

19. THE CHICKEN AND EGG
SYNDROME
In order to escape chicken and
egg, companies:
• Offer initial merchants very low
commission
• Increase their marketing spend
• Run welcome offers - often at a
loss
Monday, 28 January 13

20. THE BUSINESS MODEL
Monday, 28 January 13

21. THE BUSINESS MODEL
Monday, 28 January 13

22. THE BUSINESS MODEL
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23. GROUPON’S PERFORMANCE
2008 2009 2010
Commission $0.005m $11m $280m
Source: Groupon IPO prospectus
Monday, 28 January 13

24. GROUPON’S PERFORMANCE
2008 2009 2010
Commission $0.005m $10.9m $279.9m
- Cost of sales $0.163m $4.5m $263.2m
= Gross profit
e
- $0.158m $6.4m $16.7m
Source: Groupon IPO prospectus
Monday, 28 January 13

25. GROUPON’S PERFORMANCE
2008 2009 2010
Commission $0.005m $10.9m $279.9m
Cost of sales $0.163m $4.5m $263.2m
Gross profit - $0.158m $6.4m $16.7m
- Operating costs $1.6m $12m $700.3m
= Operating loss
e
- $1.7m - $5.6m - $683.5m
Source: Groupon IPO prospectus
Monday, 28 January 13

26. THE BIG GAMBLE -
REPEAT SALES
Groupon will only become
profitable if customers carry
on buying
Monday, 28 January 13

27. THE BIG GAMBLE -
REPEAT SALES
1st
1st year
quarter
Commission per
$3.46
registrant
Cost of sale per
$4.86
registrant
Gross profit -$1.40
Source: Groupon IPO prospectus
Monday, 28 January 13

28. THE BIG GAMBLE -
REPEAT SALES
1st
1st year
quarter
Commission per
$3.46 $16.68
registrant
Cost of sale per
$4.86 $4.86
registrant
Gross profit -$1.40 $11.81
Source: Groupon IPO prospectus
Monday, 28 January 13

29. THE BIG GAMBLE -
REPEAT SALES
BUT:
• Operating cost per registrant in
2010 was $13.84
• Increased competition is forcing
marketing costs up
• and commission rates down
Monday, 28 January 13

30. ARE DAILY DEALS SITES DOING
ENOUGH FOR THEIR CUSTOMERS TO
GUARANTEE REPEAT SALES?
Daily deals sites are marketplaces -
bringing merchants and customers
together, enabling:
• merchants to sell excess inventory
and acquire new customers cost
effectively
• customers to save money and
discover new products, services and
brands
Monday, 28 January 13

31. HOW DO YOU SUCCEED IN A
CROWDED MARKET?
• Be different
• Build a sustainable
competitive advantage
Monday, 28 January 13

32. SO, HOW WOULD YOU
SPEND £100,000?
• Buy shares in
Groupon - you get any
increase in value
• Start your own Daily
Deals site - you get
profits / cash if the business
is sold
• Put it in the bank - you
get the interest
Monday, 28 January 13

33. THANKS
Monday, 28 January 13