Groupon went from brand new startup to 7,000 employees in only two years. They’ve now filed for an initial public offering (IPO) to take the company public on the stock exchange and evaluated themselves at $25 billion. Naysayers to the company’s business model call the company “Grouponzi” and “vaporware” with one commenter calling the startup “insolvent.”
Where does all of this negativity for Groupon come from? It’s not “Anti-Bubble Fever”, though that could play a part in it, since these same things haven’t been said about Zinga – another startup going public soon.
Instead, they are because of Groupon’s business model. From a plain accounting standpoint, all of the above descriptions are apt. The amount of money that the company spends in recruiting new partners (retailers) and new buyers (consumers) is staggeringly huge.
This evaluation shows that for the 25% of the take that Groupon gets for each coupon, they are spending more than double that to seal the deal between consumer and retailer. That’s obviously not sustainable. Hence, their business model must suck. Right?
Here’s something to think about: Groupon has no real competition. It’s closest major competitors are Google and Yelp, neither of which are really competing with Groupon where it matters most: in gaining recognition as the facilitator. Other competitors would be the near infinite number of online voucher codes, such as www.partypokerbonuscodes.com or discountvouchers.co.uk to name a few, but they simply don’t have the local spread that Groupon is developing.
Both Google’s online-offline search for local business and Yelp’s consumer ratings system are entirely online and only pointing to offline business. This makes it very difficult for a business to find out (or even know) that their customers came from Google or Yelp.
Groupon bridges that gap because every customer that comes from Groupon come bearing a printed coupon from the website. This means that businesses know that their “advertising” (i.e. deep discounting) with Groupon is paying off with a potential repeat customer – the whole point of advertising on Groupon in the first place is to get repeat customers in the door by luring them initially with a deep discount offer.
That model is infinitely sustainable. It’s getting businesses to understand the payoff that is going to be rough on Groupon now that they’re established.