Why Groupon is broken

June, 2011

Is he barfing up a hairball?!

There’s been a recent spate of articles about how Groupon is losing money, how sales are declining in their longest standing markets, or how costly new deals are to come buy. And while this is concerning on its own, I figured it was worth addressing the larger issue of why their product just isn’t that compelling.

Group buying isn’t new

Group buying isn’t a new game. Groupon may have rebranded it with social media savvy, but it’s something people have been doing for years. Here are just a few examples in case the hype has made you a bit myopic:

  • Warehouse Clubs – e.g. Costco, BJs, etc
  • Deal-a-day sites – e.g. Woot.com, Tanga.com
  • Life insurance programs

Get it? Yea, the model makes sense, it’s a good position for consumers. It’s like unionizing consumer goods purchasing.

But Groupon took a model that worked, and broke it.

The wrong offer at the wrong time

So why is that? Well, it’s got a lot to do with the fact that frankly, their model stinks. Let me break it down like a fraction:

(People like deals * People need stuff) / Groupon has deals on stuff = Sales!

But this is how the real world works:

(People need certain things * deals motivate a % of people) / Groupon has deals on one thing at a time = Coincidental Sales

Deals come along when groupon happens to get them, but there is no relation to when I might actually want or need them. Many of these deals aren’t actually limited by time, you can use them whenever you want. But that does little to actually motivate users to buy.

So if you apply this to a huge marketing list then you’ll get huge sales at first, but the novelty wares off. People get sick of checking a site that is hardly ever useful.

Yet another Groupon photobook deal

The other side of the coin is that they are trying to win over everyone, not just a few key verticals. And it’s tough to make everyone happy with one deal.

The running joke at our office is that Groupon would be great if I needed facials and photobooks. Maybe that’s the market they want, but it isn’t me, and isn’t most people…

Groupon Personalized Deals is an attempt to fix this, but it remains be seen if they can pull off this level of deal flow and variety. I’m not holding my breath.

Why group buying works elsewhere

Let’s pick two examples from the existing models above: Costco & Woot. These two have a good thing going for them, and they are squarely in the group buying deal space.

Costco makes it work because they offer most of the items you normally buy at good prices all the time. That’s pretty simple, lots of deals, always there when you need them.

Woot is a bit closer to groupon because they are (mostly) a deal-a-day site. But they have a niche, they have a good sized customer base who they understand and they know how to sell to. They have also fanned out into more of a deal site (deals.woot.com). This works because they have a vertical(ish) focus and they now offer more deals.

How to fix Groupon

Good question, I’m glad you asked. I may be wrong, I have been before, but I think they need to focus by offering more deals in their most profitable verticals along with offering more long-standing deals.

Groupon should be a place to find tons of deals on services, and that also has one crazy-hot deal-of-the-day, not a site that is solely focussed on that one deal.

What do you think?

  • http://www.CouponSavingsList.com Harvey Clay

    Hi Adam. Great article! I Re-Tweeted it. I don’t mean to be self-serving, and you can leave out the URL and any reference to Qnanza, but I think they are coming out with the model that you describe in your article. They are a part of AdzZoo which has been helping small and mid-sized businesses for over 2 years now, and the Coupon Division will be an added value. The Countdown will be per number of deals, and will be designed for the long term retention of new Clients, what every business wants.
    Keep up the good work!

  • http://adamcovati.com Adam

    Harvey, thanks for your reply. More power to anyone who can nail the group buying experience. We’ll see where this whole space ends up in a year…

  • http://www.dan-london.com Dan London

    I was SHOCKED to see that Groupon is losing so much money since they get such a huge cut of the total sale.

    I think the biggest issue for the stores/services offering the Groupon is that they think of the services as a way to gain new customers even though they’d operate at a huge loss. From the data I have seen, this is not the case and the people who redeem the coupons only buy what is offered on the coupon. A smarter way to do it could be to make sure that even if you did not gain a single customer, that at least you’d break even. That is probably difficult since Groupon takes such a large cut.

    I still want to know how Groupon is losing so much money…

  • http://adamcovati.com Adam Covati

    It’s not crazy for a company to be operating at a loss early while they are gaining market share or establishing a reproducible model. However, I do think they are a bit far along to be turning $2 into $1 (roughly).

    I think this is a case of a company doing whatever they can to perpetuate hype without considering the long-term viability of their offering. This is further proven by the weaknesses in product I was talking about.

    Basically, they have a lot of work to do before I would consider them a sound company or investment.