Wednesday, August 15, 2012

Groupon is victimized by its own success

Two years ago, Google offered to buy Groupon for $6 Billion. They should have taken the money and run.

After announcing yet another poor month of sales and missed profit projections, Groupon's stock fell 27% to $5.51 which is almost one quarter of the stock's $20 selling price when it debuted last November. Their market cap now? $3.6 Billion.

Oops. Another internet bubble burst.

But why?

First, the business model is flawed. Groupon sells to retailers under the assumption that new customers who came for the incredible discounts would become regular customers who were willing to pay full price. In reality what happens more often than not is Grouponers use a coupon for a transaction on which the retailer loses money and never come back.

Second, the service was too easily copied. Living Social, American Express, Bank of America and others all offer daily deal services that are either just like Groupon or, in the case of the financial institutions, easier to use. There was nothing proprietary or patentable in Groupon's business model, so it was inevitable that once it was successful, copycats would flood the market.

Third, their advertising. Groupon fell for the line that if their Super Bowl advertising was controversial it would get them noticed and help build their business. I've chronicled that debacle here and here... But they could have saved themselves a lot of heartache if they had just bothered to watch the spot.

It's a sad tale. One that's repeated too often when successful entrepreneurs listen too closely to all the people telling them how smart they are and forget that maintaining success is harder than achieving it.

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