Wrote this cover story feature article for PC.Com magazine in Malaysia for their September 2011 issue.
Global recession? Tell that to online group discount merchant Groupon, which officially began its journey to IPO riches on 2 June 2011. In a space of three short years, the company went from a small company offering a deal for its local pizza joint to a multi-million dollar generating one offering daily deals on “the best stuff to do, see and buy in 43 countries”. Though many analysts felt Groupon made a mistake in rejecting last year’s USD$6 billion buyout from Google, its business in 2011 is said to be valued at USD$25 billion. Not too bad for company with a seemingly simple business model based on the concept of online group buying discounts.
Group buying as a means of obtaining a good discount is hardly a new idea and its online iteration is still active in various forums around the world including our very own LowYat.net. In the Bulk Orders topic section of LowYat.net, forummers gather and organise bulk buys for various products. The actual concept of group buying is rather simple and is said to have its roots in Tuangou, a shopping strategy said to have originated from China.
Essentially, several people agree to approach a merchant and leverage their numbers to purchase specific items in large quantities for vastly reduced rates. It’s a win-win situation for everyone involved. While there’s a certain degree of risk involved in the process (usually with the person brokering the deal), it’s relatively safe if the buyers follow forum rules. Additionally, forums often carry a blacklist of people who have run afoul of forum law and its useful to check this before embarking on a bulk buy process.
Where Groupon seems to have built its success on has been the elimination of risk involving the deal broker. The company offers a safety net for people to take advantage of bulk buy discounts while they themselves assume the role of a deal broker. Groupon’s founder actually started it out as a side project of The Point, a business he began in 2007. The Point was conceived as a go-to place for people to voice their problems.
In the words of founder Andrew Mason: “Users of The Point would join or create a campaign that brings a cause to the attention of retailers and other businesses. Once a particular tipping point is reached, members would take action on whatever was pledged for the campaign.
Andrew Mason – “Once a particular tipping point is reached, members would take action on whatever was pledged for the campaign”
Unfortunately (or fortunately, depending on your point of view) for Mason, The Point never really took off apart from some isolated successes such as a group buying project pulling 80 people together to get a discount on an Economist subscription. A little while later, armed with notes from studying the experiences of Mercata, an online group discount site that went out of business in 2001 despite filing for an IPO prior to its shutdown, Mason began plans to develop a better business based on the tipping point principle.
In Mason’s view, Mercata’s failure was down to their focus on consumer products, which several large e-tailers were already selling at wholesale prices and therefore didn’t have much wiggle room for prices to drop further. Additionally, he was against the idea of users having to wait a week to experience their discount.
The speed at which Groupon has grown can be attributed to word of mouth powered by social media and a simple but effective referral reward programme. The company put in place an easy to understand and effective programme where members who signs up a new member to the company via email, Twitter or Facebook, would get Groupon dollars (equal to real money) to use towards other Groupon deals. In many cases, the viral nature of the majority of the deals went a long way towards Groupon’s towards Groupon’s meteoric rise to become the Web 2.0 darling of 2011.
Part Groupon’s appeal stems from the new experiences they offer to their 115 million subscribers, which might account for a rise in people taking up skydiving – one of Groupon’s most popular deals. According Groupon spokeswoman Julie Mossler: “Customers look to us to get them off the couch and introduce them to something … For a lot of people, the discount is more of a catalyst or excuse to do something you wouldn’t normally do”.
Julie Mossler – “Customers look to us to get them off the couch and introduce them to something”.
Indeed, it is this drive for discovery along with a posse of competitors breathing down their necks that led Mason to launch GrouponNow in March 2011. It’s a new mobile-app based service that offers consumers two basic choices, “I’m Bored” or “I’m Hungry”. It’s also an answer to Groupon’s most vocalised criticism – that its business model is infinitely ‘copyable’.
Mason describes this new service as a way to get “people to think about Groupon every time they walk out the door” and thanks to a recent partnership with Foursquare, this vision might translate into reality in the very near future.
Prior to the deal with Groupon, Foursquare had already launched location-based daily deals with LivingSocial, Gilt City, AT&T Interactive, BuyWithMe, and Zozi in the US, UK, Ireland, Canada, Australia and New Zealand. It’ll be interesting to see what Groupon does with its partnership as it battles copycat companies springing up across the globe.
Groupon’s bid for world domination seems to be based on buying out those copycat businesses in strategic locations across the globe. Over the past couple of years, the company has expanded at a ferocious rate, acquiring CityDeal (Several European countries such as Germany and the UK), Groupoer (Israel), Twango (South Africa), and Darberry (Russia).
It’s also expanding aggressively into Asia, through its acquisitions of Groupsmore (Malaysia), Beenomic (Singapore), Disdus (India), uBuyiBuy (Hong Kong), Atlastpost (Taiwan), Qpod (Japan) and SoSasta (India).
What’s startingly similar about those acquisitions is the relative youth they share – many have only been in business for less than a year before being bought into Groupon’s world domination plans. Groupon’s Malaysian operations are run by YouthAsia founder and season 1 winner of The Firm, Joel Neoh. According to Joel, “Groupon’s acquisition plans focused on two things – the people behind the business and can they drive and scale the business model locally”.
Of the company’s many competitors out there, its most serious challenger is LivingSocial, while Facebook Deals and Google Offers have the most potential to disrupt Groupon’s business. LivingSocial and Groupon are presently the two largest players in the daily deals space with 90% of the daily deals traffic attributed to them.
Facebook and Google seem particularly well-placed to compete with Groupon solely on the basis on the strengths of their existing social networks and their ability to filter deals to offer highly targeted deals. One of the biggest complaints Groupon members have is the amount of irrelevant deals they receive over the course of a few days. Some have even taken to “setting a filter to auto-junk all emails from Groupon deals” while others treat it as another form of junk mail.
According to the Wall Street Journal, one-third of Groupon deals worldwide are for health and beauty (31%) while the rest of the deals are spread out between food and drink (23%), activities (15%), services and events (11% each), and retail (9%). In Malaysia, the deal spread is quite different with food and drink (30%) accounting for one-third of Groupon Malaysia’s deals while the rest are on beauty & wellness (25%), activities (20%), travel (15%), and goods and services (10%).
GrouponNow and FourSquare may well be the solution to Groupon’s constant drive to create win-win situations between merchants and consumers and allow for better targeted deals to reach the right audience at the right time.
Consumers are one half of the Groupon equation and arguably, the other half is what makes the deals so attractive – the merchants themselves. They typically see Groupon as an alternative advertising outlet which allows for some form of targeted marketing. The company works closely with merchants to come up with the best possible deal to benefit both parties and charges 50% of the deal’s revenue. For a great number of companies, this works out cheaper than a full page advertising spread in a national newspaper and is likely to be more effective due to its targeted nature.
Despite Groupon’s stellar success and being called by Forbes as “the fastest growing company ever”, it hasn’t had a particularly smooth journey to the top. In the past year, a story went viral on internet describing one business owner’s horror experience as a Groupon merchant. She’s quick to defend that Groupon wasn’t the main cause of her problem and that it was due to a bad business decision on her part but it’s clear that becoming a Groupon merchant isn’t a totally risk free endeavor.
In March 2010, Jessie Burk, owner of a place called Posies cafe in Portland, offered a USD$6 for USD$13 worth of product deal. She was unaware at the time that there wasn’t any limit to the amount of vouchers sold and had also miscalculated the actual cost of her product. Over the next three months, she had mixed experiences with the many Groupon customers she met. Some were “wonderful customers and a happy addition to the Posies family”, others misused and misunderstood the voucher, and some didn’t even leave a tip.
At the end of it all, she ended up with a gross revenue of USD$3 for each voucher sold but lost USD$8,000 of her personal savings to overheads. Burk said: “Groupon was the single worst decision I have ever made as a business owner. I readily admit that for certain types of businesses, it is a great opportunity. Just not mine.” Data from a recent study conducted by Rice University showed that out of 324 small businesses who partnered with daily deals sites more than half made money, 26.6% lost money while 17.9% broke even.
To his credit, Mason publicly responded to her plight via Groupon’s blog. Essentially, it states he has:
- a keen interest in finding out what went wrong
- had several experiences with merchants who have had too many customers via Groupon and has created merchant preparation materials to help
- always had a policy that allows for deals to be capped
- found it “painful to read stories like this” because of the win-win situations Groupon desires to create with each featured deal.
On 23 November 2010, the Small Business blog for the New York Times ran an article called “Doing the Math on Groupon Deal” that brought some perspective to the growing tide of merchant discontent. It pointed to some factors that some may not have considered prior to being dazzled by dollar signs from Google reps and offered eight key metrics to consider:
- Incremental cost of sales.
- Amount of average sales.
- Redemption percentage.
- Percentage of own customers using coupons.
- No. of coupons bought per customer.
- Percentage of coupon users who become regulars.
- The deal’s advertising value.
- Normal cost of getting a new customer via advertising.
Despite some of the bad experiences out there, daily deals aren’t going anywhere soon. From 2009 to 2011, Google searches for daily deals increased 448%. On the other hand, Groupon would do well to take notice of the growing undercurrent of pessimism for the company around its valuation since its revised IPO application was sent out.
On 10 August 2011, the company’s original IPO was revised to remove a controversial accounting measure in response to pressure from the Securities and Exchange Commission (SEC). Under Groupon’s original measure, the company made US$60.6 million in June 2010 and USD$81.6 million for the first quarter of 2011. Under generally accepted accounting principles, the company generated operating losses of US$420.3 million and $117.1 million during those same periods.
In Malaysia, Groupon is up against the well established pair of shoppingandsales.com and offerstation.net as well as the up-and-comer, bonanzasales.com. Joel Neoh’s challenge as Groupon Malaysia’s CEO will be to carve out a Unique Selling Proposition (USP) strong enough for the Malaysian public to have Groupon first in their minds whenever they’re feeling bored or hungry (and we know how Malaysians are about food…).
The question now is, will Groupon’s Andrew Mason be able to nail down the company’s USP and communicate it to potential investors?
Update: In the time since this article was published, Andrew Mason was ousted as CEO of Groupon so evidently, the answer to my closing question is no.
Did you know?
- Groupon originally started life as GetYourGroupon.com before it was eventually shortened to Groupon.com
- Groupon’s most famous deal was for GAP where nearly half a million people spent USD$25 for a voucher to buy USD$50 worth of stuff at the GAP – it raised a total of USD$11 million
- In the UK, Groupon’s most unusual deal was for a complete wedding package at Nottinghamshire’s Woodborough Hall. The deal was priced at £1,999 instead of £5,011 and covered hire and set-up of the venue for 50 people; a three course, Michelin-starred meal, drinks reception, and a dedicated toastmaster and wedding planner. The company said 26 couples bought the deal
- Groupon Malaysia CEO Joel Neoh is also an accomplished gold medal-winning rock climber.