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Monday, October 24. 2011

Going to Market with Groupon

We all look for great deals when we buy things.  Groupon has taken this concept and turned it into a phenomenon.  Alas, it is an easy concept to mimic.  Living Social, Facebook, and Google have all launched similar products.


Meanwhile, the Groupon idea is not always a winner for the small businessperson seeking to corral new or increased business.  I recently utilized one of their offers at a local business.  While it was a savings for me, it represented a loss to the business owner.  This is the risk many people are willing to take to drive business, leading many to try Groupon once and abandon it. The Groupon story from a sales and income perspective is fraught with issues.


So is their IPO.


There was a time any dot com business could drive an IPO skyward.  The new ideas coming out today are too easy to mimic and barriers to entry are low.  Maybe someone can explain why Linked In is priced at $92, when it only earns $.07 per share and has competitors targeting it like mad?


These new businesses are not groundbreaking ideas and are being overvalued.


Groundbreaking ideas are what will drive the economy forward.  Not IPOs for coupon books.

Posted by Bulldog in Hot News & Misc. Short Subjects, Our Essays at 18:34 | Comments (9) | Trackbacks (0)

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Groupon released their first earnings report, and to say the least, they underwhelmed. I had shared some of my thoughts about Groupon several months ago. But something new is afoot. In the last week, we've seen Facebook file for an IPO.
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Tracked: Feb 28, 08:37

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I don't get it either. I didn't understand it when Groupon first appeared on the scene.

The economic model is often a loser for the business - not so much for Groupon. Why would they want to participate unless they are operating on a very thin margin hoping to make up for that thin margin with volume.

Kind of reminds me of that old joke about the guy who buys a dump truck because he can make .35¢ a mile. When his friend told him it cost .38¢ a mile, he said to his friend that he would make it up in volume.
#1 Tom Francis on 2011-10-24 20:38 (Reply)
Groundbreaking ideas AND a severe reduction in government bureaucratic idiocy that strangles small business like asthma in a growing child.
#2 fiftyville on 2011-10-24 21:12 (Reply)
Groupon hasn't opened up our area yet and the newspaper is already running their own groupon clone. They already have the ad salespeople in place, so I don't see groupon getting much business in this market. I don't think that bodes well for their stock price...
#3 KF on 2011-10-24 22:41 (Reply)
OK, if I sell you a glass of lemonade and you pay me 25 cents, I get it.

If I babysit for your kids or rake your leaves, and you pay me $1, I get it.

Where does GroupOn, FaceBook, LinkedIn etc fit in to this market analysis? I'm just contributing all my intimate details for FREE... for THEIR trail into The Cloud? Where I'm going to find a vast market unavailable to me in any other way. And leaving a huge trail for THEIR Cloud Companies to use as they they chose? Speak to me?????

Could this possibly be another BUBBLE? OMG!
#4 jma on 2011-10-25 01:02 (Reply)
There is a place for companies like Groupon.
If I'm opening a new business, seeking to drive foot traffic, or introduce new products.

If I have business that is clinging to life, but needs an injection of new consumers.

Giving a break, offering a coupon, is always worthwhile if you're a good business manager and have solid inventory and pricing fundamentals.
At that point, Groupon and its clones offer a means of distribution which is unprecedented. But this is also problematic - because it is unprecedented. You may wind up getting more visitors than you counted on, and incur more losses than you expected.

It's by no means a winning concept for any company aside from Groupon or its clones. Some of the clones do the job better - and that is something Groupon has to be concerned about.

Either way, if I had a business, I would be extremely careful about how I managed utilizing one of these discount services.
#4.1 Bulldog on 2011-10-25 07:21 (Reply)
QUOTE:
...if I had a business, I would be extremely careful about how I managed utilizing one of these discount services.

Exactly. The challenge w/Groupon is that if the discount you offer is really successful, it could cost you much more than you can afford. The discount, according to Groupon's rules, requires that you discount your goods or service at least 50% or more. On top of that, Groupon receives 50% of the total sales, which are made directly to Groupon, and then they issue you payment of the remainder, or roughly 25% of what your business would normally receive for the product or service.

One can limit that number of "groupons" that are made available, and set a minimum number that must be purchased that, if not achieved nulls the whole deal. If I recall correctly...

I've seen it work well with, say, a golf course owner who, once the discounted round is used as a loss leader, sells beer, cigars, golf balls, cart rental and a hot dog or two to a brand new customer. I've also heard of service providers being overwhelmed by new users who cannot be upsold, and simply take the steep discount once and disappear, costing the vendor a great deal of money.

Great deal for the customer, risk/reward proposition for the business. One thing for certain, once Groupon is in your market, they are very aggressive.
#4.1.1 Pajak (Link) on 2011-10-25 09:04 (Reply)
Agreed, but it's like the saying about a joke being funny once. Eventually it catches up with you and with Groupon, there are already questions being raised about it's viability.

I understand the Groupon model - on paper it makes a lot of sense - for them. Once business' understand that its not such a great deal, it will die and rather quickly.

As our great friend Bulldog originally said, "The new ideas coming out today are too easy to mimic and barriers to entry are low. And he is exactly right. Once the market becomes saturated, it's over.

By the way, Netflix is a perfect example of this mimic concept. Because of competition from on-line streaming, Amazon's entry into the market and others getting into the act they were forced to revamp their whole operating premise breaking on-line and DVD rental into two parts. How'd that work out for them? Not so well - they've lost almost $8 Billion in market cap IN ONE MONTH!! And now, they've admitted losing 800,000 customers and the stock is getting hammered again as of this morning. Its hard to see how Netflix can survive.
#4.1.1.1 Tom Francis on 2011-10-25 09:21 (Reply)
Pajak,
I just came back from a seminar on applying strategic thinking. The end of the class revolved around the idea of "loss leaders".

Basically the fellow who ran the class came from the supermarket business and loss leaders are very common, particularly during periods when sales goals are running below par. The most common loss leader is soda - offer it out below cost, drive more traffic.

After years of doing this, he did a study of the results to see if it worked. He determined that some do work, but most don't. The reasons are multiple, but basically it comes down to a few simple things. First, people tend to buy the discounted stuff and nothing else. Second, (this is specific to grocery stores) if your cart is filling up rapidly, you tend to stop buying. So, as you buy large amounts of discounted items (soda takes up space), you buy less of other things.

Add that to the points Tom makes, and you're in some rough waters.

Companies that run the Groupon business as a sidelight (Amazon, for example), will make it work more effectively. Groupon, however, will have a hard time expanding into Amazon's business. Eventually, businesses will find other companies to work with aside from Groupon. Or determine Groupon's model is a one trick pony that doesn't really work for them.

Netflix is an amazing case study because it has 2 problems. The first is the one Tom mentions. The second is bad PR. They handled their price increase in exactly the wrong way - a manner which alienated their user base. Once the damage was done, it completely undermined their overall model, opening up the door for other firms which were on the fence about entering the industry.

Netflix has been on the "to short" list for me for months. Had I not been busy and work and had been paying attention to the news, I'd have shorted that one in the 300 range...its P/E ratio was unbelievably impossible to make sense of. Just totally unrealistic. Like Linkedin.

FYI, I'm paying attention to Linkedin. They are in my business. I like their business, but it's not a $92 company. Maybe, MAYBE $30. And that's being generous. Still, it's not a company to short right now.
You have to be careful about when to short or you'll go broke. I'm considering a put option since I don't have much time to pay attention to the details.
#4.1.1.2 Bulldog on 2011-10-25 21:48 (Reply)
I believe Amazon is going into the one "coupon" a day offer thing. I'd bet against Groupon if The 'Zon enters the fray.
#5 BlogDog on 2011-10-25 09:48 (Reply)

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