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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10 Responses to “Is Groupon's Strategy Off the Mark?”

  1. I have to agree about you questioning the long term viability of the business. As you have correctly stated, I am one of those for whom GroupOn’s novelty has worn off and even if I open their emails, hit Delete in less than 5 seconds. I have not bought a single Groupon coupon to date either because most of the coupons don’t match my interests and because of sheer inertia. Competition is getting intense and if they are losing more and more customers (both consumers and advertisers), there is nothing left from the first-mover advantage. Given that GroupOn is drawing all sorts of investors letting employees cash out, I wonder of motivation drain amongst employees that turns the company to be more and more short term focused.

  2. Maybe Groupon has got the right focus of being orientated towards new acquisitions, but maybe it is the 40% of client companies who jumped ship who are losing the opportunity to stay in touch with their new found clients through other means. The same might apply to the 60% who stay on board too.

    The increasing cost of capture might reflect consumers generally increasing aversion to spend on anything at this time.

    However as an IPO investment, LinkedIn peaked at $121 per share, and has lost ground every day since, and is now down to $73/share, below the offer price of $81/share

  3. The challenge for Groupon ahead is definately going to be centered around how to monetize their subscriber base to the fullest extent. I keep talking about this ‘celing’ they will ultimately hit. By that I mean there are only a certain number of people interested in this type of service and as you mentioned some buy once and never return again. I have friends that use it religiously and others that leav frustrated with inability to find exactly what they are looking for. What is Groupon doing besides being a go-between for the retailers? I think there is an untapped opportunity here for them to help market the brands that are advertsing deals. How likely are you to buy a spa certificate if you have never heard of the spa? Imagine the experience if additional information was provided to the person viewing the deal. How can they get the people that open emails everyday and never buy anything to actually buy something? This is where I would focus my energy if I was at Groupon.

  4. Buck says:

    The businesses that repeat with Groupon are the key to it’s future. The 40% which currently say they will not repeat is a figure sure to increase as the current excitement wanes and reality sets into the analysis.
    The evaluations of Groupon worth are grossly exaggerated.
    The basic reason for a business to participate is the hope that new customers will result. That is not happening.
    Groupon management is less than efficient with few signs of strengthening
    As for the Groupon IPO-I’ll pass. It will be like handling a hot potato and will need to be moved quickly out of the portfolio when the inevitable turn down takes place

  5. Sean says:

    Recently, techcrunch had a fairly in depth article about the Groupon business model:

    http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

    Mentions why business may or may not work with Groupon again – hope it helps.

  6. The business in its current offering will run it’s course, it’s not sustainable. A combination of the declining legitimacy of the offers, as merchants use the site as a dumping ground for overstock, slow moving goods or as a cheap footfall generator and the public wising up to this. And many merchants don’t particularly want Groupon controlling their foot traffic and potentially cheapening their offering. Putting products and services into a plastic egg and leading consumers to an arcade-equivalent crane grabber is only going to hatch disappointment for both parties.

  7. One of the first things I remember when first learning about business is the 80/20 rule, 80% of your revenue comes from 20% of your customers. I don’t think this is absolute fact, but the principle is definitely true. You can’t have a business model that focuses on new customer acquisition. As they are finding out, it costs more per new customer as time goes on. The real value is in the customers you already have. That’s why lists are so popular.

    I think they should work with their advertisers in putting together a campaign that will both maximize the number of coupons sold, and the advertisers ROI. But at the same time get to know the subscribers and their interests. If you’re constantly getting bombarded with coupons you’re not going to use, after awhile it just starts to look like a spam email. They should only send coupons the subscriber would be interested in, or complement their interests.

    This brings advertisers back, because they see a good ROI, and the subscribers will open emails if it contains a coupon to a place they already like, or may be interested in.

  8. Tom Murphy says:

    There is a huge misconception that consumers are all about immediate gratification and do not plan purchases. I think as one works through business models they see that reality is much different. Perhaps I might jump at the notion of driving out of my way to get some cupcakes, but large retailers are going to have an impossible time getting me to impulse shop on a large ticket item.

    Groupon really does not know what I am researching, investigating nor interested in. Targeting must be a nightmare.

  9. I get loads of Groupon emails, have never been to the website or signed up to a mailing list, no wonder they have such low open rates!

  10. Duran seo says:

    I think the coupon fever is complete madness. businesses are practically losing money every time the make an offer.

    i think that these business models are actually going to cause a chain reaction to the world financial system. there is no sense in losing money just for a few non loyal customers.

    i don’t understand how this bubble is still alive. and who is really interested in buying groupon stocks?

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