Is Groupon's Strategy Off the Mark?

I’m sure by now you’ve heard about Groupon’s IPO, which has more than one person singing “here comes another bubble…” Many folks including Forrester’s Sucharita Mulpuru believe the daily deals site is way overvalued, and question whether the business has potential for future growth, or is headed for a burst.

Though it lost $400 million in 2010, what’s most concerning about Groupon is that, by its own admission, it’s hyper-focused on customer acquisiton – both for advertisers and subscribers. Little effort is put into winning repeat business from existing accounts, squeezing more sales out of buyers or re-activating lapsed subscribers. From the horse’s mouth:

“We spent $179.9 million on online marketing initiatives relating to subscriber acquisition for the first quarter of 2011 and expect to continue to expend significant amounts to acquire additional subscribers. If consumers do not perceive our Groupon offerings to be of high value and quality, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain subscribers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to re-activate subscribers or increase the level of purchases by our existing subscribers. If such expenditures or initiatives become necessary to maintain a desired level of activity in our marketplace, our business and profitability could be adversely affected.”

Though aggressive acquisition can be a winning long-term strategy, there are a few problems in particular Groupon faces:

Attracting new subscribers is becoming more expensive.

Numbers cited by the NY Post suggest it’s getting more expensive for Groupon to attract new subscribers, and customers on average are also generating less revenue year-over-year. Each new subscriber costs $6.40 in marketing expense, compared to $2.45 the same quarter last year. Each customer generated $9.65, down from $17 last year. Ouch. With only 19% of subscribers actually buying a deal, the only hope is squeezing more revenue from subscribers.

Subscribers are losing interest.

Many of us can relate, at first the Groupon concept was exciting and we looked forward to daily emails. We were so enamoured we even signed up to the clones. Some of us even purchased a few, on impulse, yet to cash them in. But after a few weeks, the novelty wears off and we ignore them just like all the other commercial email we opted into. OK, I’m speaking from experience, but surveys show I’m not alone.

Business Insider polled its own readers found that 35% of Groupies open “almost none” of the daily emails Groupon sends, 40% open fewer and only 25% are opening more often than when they first joined. 69% of Groupon subscribers do not expect to purchase Groupons more frequently in the future. Groupon should be just as concerned, if not more, of keeping subscribers engaged than sniffing out new ones.

Advertisers are not ecstatic.

Aside from publicized Grouponmares, 40% of businesses who have advertised with Groupon would not participate in a deal again. Hey, that still leaves 60% who could potentially advertise again, right? Without a good retention strategy, Groupon will squander these relationships.

As word gets out about the poor ROI and other issues and businesses are courted by competitors like Living Social, Facebook and Google Wallet, it will be harder to win new business than quarters past.

What do you think about Groupon’s strategy?

Should Groupon’s focus be on winning new subscribers and advertisers or will it advertise its way out of business? Would love to hear your thoughts in the comments (linked for email subscribers).

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