We identified the core elements describing a business model in this post: we now apply the methodology to Groupon, so far analyzed only from the merchants’ point of view (1,2,3). Groupon business model is not “pure” anymore: Groupon has begun to diversify its fundamental business logic, extending the original model and offering new propositions. For the sake of simplicity, here we consider mainly the original “daily deals“: coupons sent by mail to all Groupon database contacts,offering hyper discounted products and services deliverd by merchants of a specific city.
According to the Business Model Canvas methodolody, Groupon core elements are:
1. Customer Segments. Groupon is a two-sided-market, i.e an aggregator (or economic platform) that allows transactions between two user groups, who benefit by the platform network effects. On one side we find the local consumers purchasing coupons /gray box): these are mostly women, students, singles and “professionals” with high income (incl. high literacy and internet usage). On the other side, we have local merchants such as restaurants, spas, or small enterpreneurs offering services (blue box). Merchants are real customer segments for Groupon and not just partners: they don’t offer complementary products to build Groupon offer, but they are key players without which the whole exchange would not exist at all. Hence, Groupon needs to target them, offer them a specific value prop and develop a direct relationship. Groupon has now started to extend the targeted B2B: it widened the scope from local shops to big brands (e.g. fashion, travel,etc.) supporting nation wide promotion sales leveraging the list built by joining the local city databases. Groupon has also started to target big event organizers delivering larg online ticket sales (GrouponLive!) .
2 Value Proposition. Groupon must deliver a specific value proposition for both groups: deep discounts for consumers thanks to crowdsourcing . The value propo for merchants, as previously discussed, is an innovative advertising tool, in which marketing costs are incurred only for actually sold deals. Groupon greatly accelerates the customer acquistion process of merchants, even rhough it is not very effective profiling and segmenting customer by potential attractiveness for the different types of local businesses. This is a serious issue for the profitable usage by merchants and it can undermine their long interest in the platform. To counteract this, Groupon is now extending its offer into payment and credit card systems: a new revenue stream which allows to perform analytics on payment transactions for a more effective profiling of database contacts (the story behind Groupon credit announcement).
03 Customer Relationship. Relations with consumers is oriented towards “low cost“ and savings, but also on building trust and confidence: Groupon must gurarantee deal transaparency and reimbursement of fraudolent and not trustable merchants. A trusted relationship is becoming paramount for the maturation of this model: new competitors are now copying Groupon, thus brand and reliability are key to maintaing existing customers base and their share of wallet. However delivering growth and deal quality for trusted relationship is challenging: growth requires expand mailing list realestate, multiply variants of newsletter and local schedules, thus it rises the costs of merchant enrollment and continuos monitoring of deal quality. Likewise, the more unsatisfied customers ask for reimbursement the more Groupon must tighten conditions for alloed reimbursements. Simply stated, revenue scalability, quality standards and trusted relationship are a challenging conundrum. Other double sided market (e.g. Amazon or eBay) are leaner: they control supplier quality through cheap consumer voluntary scoring and have negligible cost to add a new merchant to the platform. Groupon is different: local merchants are few compared to the addressable market of global sellers for Ebay and they are recruited by a direct salesforce not through online self-enrollment. Tightening the merchant selection criteria reduces a narrow addressable market and ibncreases recruitment costs. With respect to the relationship established with merchants, Gropuno promises to be a trusted marketing partner: a full team of professionals (offer consultants and creative marketeers) to outsource the process of new customer acquisition via professioanl campaigns. As seen in Groupon creates value for merchants? , this wish is not always fulfilled: Groupon sales have sometimes mismanaged merchants trust to pursue maximization of caompany revenues, particularly avoid to proactively succes limit on maximum promotion cost during trials (read criticism here ). Moreover, the expensive share required on sold deals has alienated the trust of some categories of merchants, a serious risk for the long term sustainability of the model.
4 Channels. Groupon leverages mainly “online” channels for consumers: email, website and integration with social networks to take advantage of viral marketing (all Groupon deals include links to Twitter and Facebook). The business model has been recently extened by introducing the mobile channel: Groupon Now is a location-based smartphone app where merchant can self launch real-time deal-on demand for nearby shoppers with limited duration. For merchants, the main channel is the Groupon sales force, i.e. agents who need to qualify and enroll most interesting city businesses signigng agreement contracts. In addition, Grouon leverages an online B2B portal (GrouponWorks), which contains information on products, value props and case studies to foster Groupon usage .
5 Key activities. Groupon scalability is challenged by the cost of the key activities involved in its core business. First of all, sales who close agreements and sell campaigns. To manage proliferation of local newsletters, Groupon has created “city planners”: qualified professionals managing the inventory of available deals and their weekly schedule across all newsletter variants within a city. Content creation, publishing and email campaign management are other key tasks implied in Groupon operations. Last but not least, Grouopn must excel in performing Profiling and Business Intelligence across the consumer and merchant databases and has developed Merge & Acquisition skils to enter new markets and acquire exising player in order to maintain rapid growth and first mover advantage.
6 Key Resources. Key resources are obviously those engaged in activities above: sales, developers and marketing experts. Key resources we did not mentions are consumer and merchant databases: these are the engine for all offers and all future monetization options of Groupon model; moreover, they containt the result of the investments in organic customer acquisition and buyout of other mailing lists and databases.
7 Partners. Groupon has created partnerships to expand rapidly in markets where organic growth was not effective. This is part of the logic of first-mover, gain scale as quickly as possible to increase the network effects, pre-empting possible future competitors. An example is the one with the chinese mobile operator and internet giant called Tencent : they opened a joint venture called Gaopeng (which recently merged with another provider coupons creating GroupNET). After a succesful initial entry in China, groupon started to suffer for many local competitors and it became difficult to grow without a significant local partnership. Grouopn might also kickoff soon new partnership to acquire the skills and volumes needed to extend its business model into payment and credit cards.
8 Revenues streams. The most important component of a business model is its revenue generation, ie how the value proposition for all customer segments is finally monetized. We discussed this extensively in 1 , 2 , 3 , where we saw that the company gets a 50% commission of the post-discount value of sold coupons. There is a non trivial advantage of this model: Groupon is cash flow generator, since cash from coupons is almost immediate (30 days max), while the share paid to merchant is due an average 60 days afterwards. This allows to better cope with the growing need for marketing funds during customer base and merchant expansion. In addition to transaction fees, Groupon is seeking to diversify revenue sources by extending the product portfolio (Groupon Now for Mobile, Groupon Live) and selling new ancillary services to merchants. These include scheduling reservation software, customer profiling systems and new solutions to stimulate customer loyalty for recurrent sales within a specific physical store (Groupon Rewards ). We already mentioned Groupon Payments , ie. offering to merchant an alternative to incumbent POS systems, thus earning a fee on transaction of affiliated stores. Still, Groupon main challenge is sustainability of its core growth drivers: how to secure continuous growth of merchant and coupon redemption in its customer base in a market with many offers and competitors.
09 Cost structure. Groupon bear the costs for development of its web platform, IT applications and operation of its data centers . However, the highest share of Groupon costs is related to marketing and sales: financial analysts have identified these as the weakest point of the long-term profitability. For marketing, a major concern is the rising cost of acquisition of new Grouponers: the ongoing saturation of coupons in consumer inboxes is mandating to start to offer financial incentives to attract new subscribers (“present a friend” rewards). The relatively low entry barriers have facilitated the entrance of new competitors (eg Groupalia), thus churn is increasing with lower return from marketing expenses. We already discussed the costs implied by the skills needed to create and manage the local lists (city planners & marketing managers). The B2B sale sforce is the other extremely expensive item on Groupon P&L: increasing geographical coverage does not happen with risible marginal cost ( as for a new “virtual” store for Ebay). Groupon needs to invest in new dedicated local people who need time to develop knowledge of local market. Overal rhis conundrum is measured by the comparison of the CAGR trends for revenues vs. the one of sales & marketing costs.
In this example, the Business Model Canvas provided us a simple and repeatable tool to compare Groupon to other companies, investingating the respective competitive advantages. There is no dubt that predicting the long term success of a company requires also to develop a financial business plan over few years, including a quantitative estimation of its key performance indicators . Yet any financial model is good as it inputs: it must be based on a solid and crystal clear understanding of the core logic to create sustainable profits, which is where the canvas is helping us first and most.
Published by Carlo Arioli