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