How to make the Groupon business model work
Apr 17, 2013
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It was just a couple of years ago that Groupon was hailed as the hot new online company with a seemingly genius new business model. Groupon would drive traffic to physical businesses across the world without ever having to deal with inventory. The world was so enamoured that Google tried to buy the company for $6 billion. However, the major flaws in the business model only came to light once the company had gone public.
Whilst Groupon will go down with WebVan and Pets.com in the infamous online business model category because of their execution, I believe the core component of their idea does actually have merit.
In this post I’m going to briefly look at where Groupon went wrong but more importantly, show how the initial idea actually is still a huge opportunity for companies getting started today.
Where Groupon went wrong
Groupon is a coupon service that allows companies to offer discounts and have those discounts distributed through Groupon’s network. Groupon is essentially just an email newsletter that is delivered to consumers on a daily basis. When a consumer redeems a coupon, Groupon gets a slice of the payment.
Groupon has become notorious over the last couple of years by forcing business owners to offer dramatic discounts in order to get consumers through the door. This leaves very little margin for the business owner. Customers that are sourced from Groupon are typically not very valuable if they only ever purchase from the business using a Groupon deal.
Groupon has had exponential growth of revenue in a very short period of time. However, this huge growth was running at a loss. Groupon has to pay more to acquire customers than it can make from them over their lifetime with the service.
And finally, in my opinion one of the most critical flaws in Groupon’s model is the completely lack of defensibility. There are many other online coupon services that sprung up after Groupon’s meteoric rise. The problem with all of these services is the complete lack of switching costs. If you see a deal on Groupon and the same deal for less on LivingSocial, you will always pick the better deal. Groupon has no ability to ever be a preference in the eyes of the consumer. Without this defensibility, they lack the future earning potential of a great company.
It’s probably too late for Groupon to turn around now, but as I mentioned at the top of this post, I think the model can really work if the emphasis is placed in the right areas.
A model that would work
I really believe that the coupon model will work for a wide range of service businesses. If you look at restaurants, theatre shows, spa resorts or any number of other entertainment and leisure type businesses that run whilst under-utilising capacity, there clearly is an opportunity. The problem with Groupon is they approached the model completely wrong.
If I were going to go after this opportunity, I would focus on the following areas:
Service layer
Last week I wrote about the interesting trend of adding a service layer to incumbent industries through discovery and curation. Companies like Jukely and WillCall are building a service that augments the traditional ticket selling process. By surfacing new music and curating live events, both of these companies can drive significant sales to music concerts.
By wedging themselves into the industry and creating a network of customers, they are able to drive sales without asking anyone for permission. Once these business models prove that they can generate significant demand, I’m sure they will be able to command bulk discounts on ticket prices and priority access which self perpetuates their opportunity. As loyalty grows within their network, they will be able to fuel that loyalty with an even better offer for members.
Both Jukely and WillCall are going after the lucrative live music event opportunity, but as I mentioned above, there are far more entertainment and service industries that are yet untouched by this new business model.
Really the key component of this type of business model is that the service they offer derives value for the user. In the case of Jukely and WillCall, the user can find events in their local area that are curated, arrange their activity with their friends and purchase tickets from inside the app.
I think the most important aspect here is the curation and discovery of events. The social aspect can really be achieved outside of the app, and purchasing tickets is of course possible online these days. The curation of events is the unique value that these services offer and what will keep users coming back over the long term.
So in essence, the service must derive value for the user.
Content and Curation
I think content and curation will play a huge role in this type of model working across different verticals and so I’m skeptical as to whether a company can make such a horizontal play like Groupon did. I’ve previously written about the intersection of content and commerce, but I think content will also play an important role in this model too.
I think for companies like Jukely and WillCall, as well as any other company that is going after any particular vertical, content creation has to be a core competency.
As I mentioned in the intersection of content and commerce post, one of the key characteristics of making that model work is the fact that users can be immersed in the content for a long period of time before ever becoming a customer. This is a key characteristic because the customer is far more likely going to convert into a customer with a higher lifetime value.
I think as we see more of these lifestyle brands pop up, creating content becomes even more important. You want your brand to resonate with the customer and to feel like they are part of a community. Creating content is a much better tactic for increasing inbound marketing and it enables you the opportunity to cast a wide net to find new customers with an authentic voice.
By creating a service that has a stickiness, you build an opportunity that has customers regularly coming back to you, even if they don’t make a purchase. This might not seem like it should be a priority, but it creates the holy grail opportunity of loyalty.
Loyalty
Loyalty is really one of the most important things that Groupon neglected. As I mentioned above, if you see a comparable offer on two competing sites, you will always choose the better offer because you have no loyalty to either service.
Loyalty is incredibly important because it increases the lifetime value of your customer which enables you to create a sustainable business.
However loyalty is also an opportunity to build an even better service. When a customer makes repeat purchases from you, you are able to build up a profile that enables you to make recommendations that are uniquely targeted. Targeted promotions only work if they are actually intimately targeted, and can significantly increase both revenue and customer value. If a customer is unaware of a particular event that is well suited to her due to her past actions, she is far more likely to purchase when you notify her of the opportunity.
I believe loyalty is a far undervalued component of just about every business model. However, with this model, you can directly attribute loyalty to future revenues.
Subscription
A major flaw in Groupon’s business model is that is required to spend a huge amount of money on marketing to acquire new customers. When you offer a service that has a large percentage of monthly churn and not many repeat customers, it becomes a race to acquire more and more new customers.
However, already we’ve looked at how creating a service layer, content, curation and loyalty contribute towards generating customer value. I think this type of business would work incredibly well under a subscription model.
Subscription business models are attractive because you know exactly what your earnings will be and it makes it much easier to graph lifetime value as well as investigate churn. When you have a recurring revenue, it makes it easier to invest in increasing resources and building your business.
A subscription business model would work perfectly for this opportunity because it allows you to offer exclusive deals to your members. Say for example, a company like Jukely or WillCall can get exclusive tickets to a hotly anticipated gig, both of these services could offer tickets to members only.
I think this opportunity works even better if you build the subscription into the service. For example, say your a membership costs $30 a month. You could offer your customers $30 credit a month to go to events. In this way your customers would be far more likely to actually use your service and see the benefits of staying a member. You could then make additional revenue by offering even more opportunities to go to events that exceed the monthly subscription value.
Subscription services are far too under-utilised for consumer lifestyle brands. I think as media fragments, it’s opening opportunities to build a brand around a tight demographic of people. Online payments and subscription content are becoming more and more prevalent and so building focused and loyal brands is a large and lucrative opportunity going forward. These brands are extremely defensible and are able to generate real revenue.
Conclusion
Groupon started off as a promising new opportunity and had the promise of something really quite valuable. However, over the last couple of years, I believe the Groupon management team fuelled the wrong model and pumped the business for the wrong outcome.
Groupon has become a scourge to any new online business that hopes to connect consumers with businesses. I think it might be a while before those small business owners who were burnt by Groupon are open to the opportunity again.
However, as I’ve outlined in this post, I really think this business model can work.
The fragmentation of media and the continuous migration of attention to online has created the opportunity for new lifestyle brands to pop up. Companies like Birchbox, Thrillist and JackThreads are creating powerful audiences around specific demographics. Whilst these companies are moving towards commerce, I think this foundation can turn in to a number of exciting real revenue business opportunities.
HowAboutWe
An interesting company that is already executing on this model is HowAboutWe, based in New York. HowAboutWe started off as an online dating service that connected people through shared interests of first date ideas. By focusing on the first date idea, HowAboutWe was able to differentiate itself from the traditional online dating service.
HowAboutWe has since expanded to a subscription model around couples. Every month HowAboutWe sends date ideas to couples in their local area. It can be difficult to think up new things to do, and so HowAboutWe aids that discovery through the curation of upcoming events. The subscription model allows HowAboutWe to offer discounts on events as well as making the process of purchasing tickets much easier.
HowAboutWe’s business model is so interesting because they have built a loyal and engaged audience. Every couple wants to spend more time together doing exciting new things, but it can be difficult to find new ideas or organise nights out. HowAboutWe takes all the hassle out of having a good time by sourcing interesting things to do and makes the purchasing of tickets easy through a single interface. You can imagine that once a couple signs up for HowAboutWe’s service, their lifetime value will be very high.
I think companies like HowAboutWe show how exciting this opportunity really is. It’s a shame that Groupon completely blew it, but it has left a huge gap for companies that want to create authentic value for their audience and the businesses they connect to.
Can you see a vertical where this model would work? Now is the time to seize the opportunity and build a company with real revenue that people really love!
