What follows is a post from Dr. Atul Teckchandani, one of the great professors teaching Entrepreneurship at CSUF.
Groupon has the unique distinction of being a firm whose name is now a part of our vocabulary. When people buy an online deal, they talk as if they purchased a “Groupon.” Just like when people search for something online, they say they have “Googled it.” Or when people want to photocopy something, they usually say they want it “Xeroxed.”
Despite having such strong brand recognition, there is talk that Groupon may not exist for much longer.
If that does happen, it will likely boil down to its flawed business model. Groupon was created as a new way for businesses to market themselves. A business would advertise on Groupon. Typically, the business would offer deals that would tend to be half off on some product or service. Groupon would present this deal to their large base of customers, who would be enticed to purchase the deal due to the generous discount. Once they used the coupon, the business would have new customers. The word “Groupon” perfectly describes this business model as it comes from merging the words “group” and “coupon.”
But this process has two fundamental flaws.
Groupon takes roughly half the revenue generated when a customer purchases a deal. For illustrative purposes, let’s consider a restaurant that offers a Groupon deal where future patrons can pay $10 for a coupon that they can then redeem for $20 worth of food at the restaurant. The future patrons pay $10 to purchase the deal. Groupon keeps $5 and gives the other $5 to the restaurant. In other words, the restaurant just gave away $20 worth of food for $5. While this seems like a bad deal for the restaurant, there is still hope that things might work out if one of the following happens: the patron ends up spending much more than $20 at the restaurant or the patron becomes a repeat customer.
Unfortunately, the experience of most businesses is that most patrons do not spend significantly more than the coupon amount and many do not frequent the business again (Source). The reality is that people are willing to go out of their way to save 50% on something. But when they have to pay full price for it, they are not as willing to subject themselves to such inconveniences. In other words, the only entity benefiting from these deals is Groupon itself. Talk about the worst value proposition ever!
At the core of every firm’s business model is the value proposition, or what value the firm provides to its customers. A business idea that does not offer significant value to its customers should not be pursued. And it is only a matter of time before an existing firm that no longer offers something of value to its customers will cease to exist. Let’s see if Groupon can pivot its business model and find a way to start offering something of real value to its customers before it runs out of cash.