Is Groupon a good investment? The regulatory offering says Groupon plans to sell shares at $16 to $18 dollars each on a valuation of 10.8 billion, far less than the 20 billion it originally expected. But is 10.8 billion even accurate? Google was willing to pay 6 billion for Groupon and based on the current business model perhaps this offer should have been more seriously considered.
When I first heard about Groupon, the company aimed at providing daily deals in localized markets at 50-90% off normal retail prices, I was curious. So I signed up. But growing up as a consumer in a very savvy coupon market I found the Groupon offers unappealing and eventually I coded the “daily deal nuisance” to my junk mail. Now don’t get me wrong, my blog entry is not intended to knock Groupon, I actually think there is something here but in its current state the business model has serious flaws.
Here are a few:
1. Groupon does not deliver repeat visits for retail customers
Retailers need to attract recurring revenue. Coupons are best used as a sampling mechanism. If the offers are right they can result in a repeat visit. If they are wrong there is a high advertising expense and no ROI.
2. Groupon threatens merchant profitability
Too deep a discount for some and redemption that cannot be controlled threatens merchant profitability. In the old days a retailer printed a finite number of coupons and this was important because he could build the redemption costs into his financials to ensure he could afford to send out such an offer to market. Understanding coupon discount economics is fundamental to profitability especially when high volume redemption might be the outcome. Some establishments can afford higher redemptions based on their business models while others cannot.
3. Groupon is very expensive advertising
A restaurant who gives 50% off a $40 dinner gets $20 has to pay Groupon $10. The cost of Groupon advertising is too high. Therefore because participation could put a stress on the establishment successful retailers and restaurateurs stay away from this product and those struggling sign up because they desperately need customers. If Groupon is attracting the bottom end how are its collections efforts?
Here are some suggestions on how Groupon could fix their business model ensuring a better product and better merchant participation.
1. Create a better consumer product through better value-added programs for merchants
Scrap the $10 money grab. Merchants should only pay once to participate and participation is the cost of their coupon offer. Create categories for merchants to ensure wider participation that is fair but which also sets value standards for consumers. Food cost is higher in a fine dining establishment than in a fast food establishment. So a 50% discount does not necessarily work in both. It is interesting to note that the public knows this, intuitively. The assumption is that a fine dining restaurant offering 50% off might produce a lousy meal or is going out of business. (Food for thought!)
2. Sell Memberships
Groupon should consider creating a club and selling memberships. This is where the recurring revenue stream could be found. People will pay for value. Wider membership distribution could perhaps be attained through partnerships with local in-market grass roots clubs and organizations who get a small percentage on sales.
I believe a revamped Groupon could be a success with the right leadership. But in the meantime the fact that the current management had to re-state their financials in and around a revenue recognition issue should be a wakeup call to investors to cool their heels as there is no fast money here just a lot of hype around what is essentially a startup.
Groupon would be best advised to retrench, reinvent and then relaunch with a value proposition that is supported through accolades from merchants and consumers.
By Elizabeth Gage | Comments (1)