Observations on Groupon’s

business model – a primer

Christian Dahlen
Nov 2010

www.linkedin.com/pub/christian-dahlen/1/447/4b3
 Content of this document
• Business model
• Revenue model
• Customers
• Merchants
• Competitors
• Economic characteristics
 GROUPON BUSINESS MODEL

Customer signs
with Groupon
Deal reaches
critical mass
Customers
pay Groupon

Groupon Customer
features redeems
deal coupon at
Merchant Groupon pays merchant
Groupon decides
signs up which deals are merchant share
featured in a ZIP
code area
Payments spread out in 3
installments over lifecycle
of deal, leading Groupon
Notable sources: with negative working
capital
http://primitus.com/blog/whats-the-secret-success-of-groupon/
 local

GROUPON REVENUE MODEL US

GAP, Body
# of geographies national Shop

international

# of deals Long waiting list of

x Main deal merchants waiting
Categories/ to be featured
Side deals
geography
New experimental
Groupon stores feature
Groupon
net x Gross/ List
revenue price Function of
Discounted deal category; seems to
price x have increased

Net deal size x Discount to

customers (%)
Share to Groupon (%)

Typically
~ 50%. May trend 30-50%
downwards due to
competitive pressure
Notable sources:
http://techcrunch.com/2010/05/02/teardown-groupon/
GROUPON CUSTOMERS

Benefit to customers Customer demographics

• Deep discounts • Early adopters: Highly affluent with

• Discover services/merchandise that disposable income
they didn’t know of • ‘ Urban females’
• Access to new services/merchandise • 18-34 yrs
o 4 smaller ‘side deals’ in addition • Likely facebook and Twitter users
to main deal • 60k-200k users/ city
o Deal personalization based on • 100- 1000 users/deal/city
voluntary disclosure of
preferences
o Deals divvied up by ZIP code

Notable sources:
http://www.grouponworks.com/demographics
http://aimgroup.com/blog/2010/08/20/groupon-goes-niche-with-new-%E2%80%98deal-personalization%E2%80%99/
 MERCHANT OBSERVATIONS
Groupon proposition: Guaranteed revenue and large number of new customers.

Key Merchant Economics Best Suited Businesses

• Revenue: Typically retains 50% of the • High fixed cost businesses

deal minus credit card fees • High customer acquisition cost
• Redemption rate: ~80% • Business thriving on repeat customers.
• Incremental spending: Gap expectation • Rice University study:
that customers will spend more than • 66% successful
just $50, likely upward of $75 to $100 • Examples: lifestyle businesses, e.g.
once in the store spas (82% successful), sailing,
restaurants (58% successful),
• Repeat customers: 22% repeat
education
business

Key Issues Today

• Long waiting times to be featured ->competition and introduction of side deals
• Learning curve in structuring a deal (too many responses; too many discount
shopper, redemption over coupon life time)
Notable sources:
http://online.wsj.com/article/SB10001424052748703447004575449453225928136.html?KEYWORDS=groupon#printMode#ixzz0yt80rShB
http://www.retaildoc.com/blog/groupon-worst-marketing-business/
http://adage.com/digital/article?article_id=145552
http://blogs.wsj.com/venturecapital/2010/09/29/rice-university-study-groupon-renewal-rate-not-so-hot/
 MERCHANT PERSPECTIVE ON CUSTOMER INTERACTION

Respond to Get customer to follow on

Merchant

Like it on

Offer on

Advertise on

Notable sources:
http://gigaom.com/2010/09/29/hey-groupon-its-time-for-a-localsocial-roll-up/
PRESENT AND FUTURE COMPETITORS

Company Comments
Yelp • Experimenting with ‘Daily Deals’
• Has large distribution, and authority through customer ranking of business

LivingSocial •Leverages large online community

BuyWithMe •3rd largest funded start-up to-date after Groupon and LivingSocial

Google • Google’s advertising model still considered complementary to Groupon, but

competition could increase if advertisers use Groupon for marketing
• Could leverage AdWords technology to compete
• Location aware sreach on mobile

Ebay • Maximizes price per unit as opposed to increasing the number of units for a
given price
• Distribution deal with Groupon announced in October 2010

Yahoo • Could leverage lead in email toward Groupon coupons

• Reportedly made an offer for Groupon in October 2010

Local • Can leverage existing relationships with advertisers

• Salesforce already on the ground
newspapers • Partnering may be the better options to retain relationship with advertisers

Facebook • Rumored to be testing the addition of Groupon-style discount offers to

Facebook Places

Notable sources:
http://www.evanmiller.org/is-groupon-the-next-google.html
http://www.businessinsider.com/why-yelps-daily-deals-could-be-a-groupon-killer-2010-7
http://gigaom.com/2010/10/13/newspapers-need-to-do-more-than-copy-groupon/
 ECONOMIC CHARACTERISTICS

Negatives Plusses

• Lack of network effect • Brand

• No technology barriers to entry • Economies of scale (‘winner takes
• No switching cost for merchants and most’)
customers
• Scaling is expensive (sales people on
the ground)
• High cost of customer acquisition

Notable sources:
http://techcrunch.com/2010/10/17/why-groupon-is-no-ebay/