Thursday, August 18, 2011

Groupon's Fatal Flaw

It was reported earlier this week that the beloved social-discounter Groupon is losing money. A lot of it actually. Even a little creative accounting couldn't transform a $113 million loss with an $80 million profit.

Speaking from a financial perspective, the author makes several excellent points- mainly, be profitable small before becoming big. A common sign that the owners are angling to cash out with an over inflated initial public offering. That's the game. Flip it to someone else willing to pay for the name. However, as a marketer, I think it's most interesting to understand why Groupon is not profitable, despite achieving scale and recognition as the leading brand.

However, the graph above is a great indication of why. It tells the story of Groupon's Sales per Merchant in the Boston area. Despite gaining more subscribers, more revenue and more merchants in the area, it's revenue per merchant is dropping. Thus, merchants are trying Groupon, likely seeking the misguided metric of an increase in traffic or attention. Groupon delivers but then the merchants discover the real effect it has on a brand.

That should be an obvious problem to any marketer. Groupon's position in the market is to sell businesses on a discounting strategy, which may bring about short-term benefits of increases in traffic; however, in the end prove the problem of a discounting strategy. Brands cannot make a living off of customers who only pay 50 percent; meanwhile, customers who only pay 50 percent will almost never pay 100 percent.

That's going to be impossible to overcome for Groupon. While it's built to help customers cash in on huge savings, their customers are businesses.

As always, thanks for reading, sharing and contributing your thoughts.

No comments: