1) Their sales and marketing expenses are incredibly high.
2) I think the kind of deals Groupon does only work for some merchants - those with high margins, new businesses, and those that are really good at upselling once the customer gets in the door. There have been a lot of highly-publicized accounts of merchants who felt like Groupon deals ended up being very bad for them. The big hit the merchant takes sort of limits the amount and frequency of repeat deals.
3) A ton of competitors have sprung up, since there is a fairly low barrier to entry. In addition to some of the nationwide competitors, there are a lot of local companies like newspapers and tv stations that already have good sales networks and have been copying the Groupon model. This increases Groupon's sales costs and probably squeezes their margins since they may have to offer the merchant a bigger cut to compete.
I think it's a good concept and by being the most well-known business in the space they have a pretty significant advantage, but I also think it is a challenging market to be in and they are probably still overvalued.
Combine this with the fact that Groupon is reknowned for being slow to pay merchants. That's fine if yer paying back Wal-Mart, who has lots of money, but for small businesses that use these services, 3 months waiting for payment can be crippling. Read about Groupon's payment policies. They're assholes. Slow assholes.
And finally, none of this was ever proprietary or complex. Groupon had no firewalls or sandbags against competitors, and frankly, the way it treats its client businesses, it was bound to be fucked eventually.
My folks have a boutique ad firm in a small town. For the past year, they've gotten calls EVERY DAY from Groupon-like services, or even Groupon aggregators who act as middlemen for these services. It's a hugely growing market but never once has Groupon been at the table for one of these calls. They're being eaten alive.
I see this point being made in pretty much every Groupon related analysis. Why is it so expensive, and why isn't anything being done to cut down on these costs? I'd think that once customers have been acquired, the cost of maintaining them is a fraction of the acquisition cost; so the outlays on sales and marketing should decrease (from my admittedly layman perspective.)
Until Groupon solves this problem, I don't see an optimistic future. Building a product your consumers loves leads to repeat users and growth. Building something retails hate leads to Groupon.
Perhaps Groupon could do some better segmentation of their users. They must have quite a lot signed up, so why not offer many more deals overall, and each user gets the three deals he is most likely to buy. Also, you take a much smaller portion of the revenue so the business can survive. This way, Groupon would earn more through increased volume (it is kind of unprofessional to send a customer a similar deal six times a month - if I didn't buy it before why waste your reach to show it again to me?) In essence they would be a highly-tailored ad agency getting a small commission on a huge number of sales.
Thanks for the reply, I kind of agree with you on that one.
Not necessarily, it only would work if you can get repeat customers. There are many groupons that my wife sees that she would never have done if there wasn't a significant discount. These "cherry pickers" are what cause companies to lose money and make a Groupon not worth it. There was a blog/article by a woman who owned a Chicago yoga studio who was told she should do a Groupon. You can see her point of view at http://blog.tulayoga.net/2011/08/why-i-wont-do-groupon.html
They went through their childhood years thinking they were going to take over the world, and not too long ago Google offered $6 billion for those dreams. No wonder investors still had some hopes that this was something more than an ordinary business of an ordinary scale. It's not.
If anyone would like to keep dreaming, AMZN was running over $300 million losses on a ~$600 million revenue every single quarter around the year 2000.
But, like Milo Minderbinder, they'll make it up on volume.
think about it - that means that it would take 200 years of earnings to be worth their market cap (not factoring in uncertainty and all that)
I remember reading some articles back in the day about the profit margins for merchants participating in groupon 50%+ off schemes (i.e. slim to negative) and that people would turn generally up to take advantage of offers but not become repeat customers.