Groupon: Good Deal Hunting
By: Eunseo Namkung & Alafiya Shabbir
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Short-Lived Fame
Once the Internet’s darling of startup ventures, Groupon, an international online couponing and discounted goods marketplace, had been unprofitable for four years since its IPO in 2011. Furthermore, Groupon has since faced a slowdown in popularity and growth despite once boasting buzz over its rapid growth and unique business model. After scaling at what was widely regarded as an unsustainable rate, Groupon’s problems have manifested themselves in poor year-over-year financial performance and dismal customer and business retention. Both these issues can be attributed to disproportional marketing expenditures that have failed to deliver expected returns.
Marketing expenditures made up 13 per cent of revenues and 29 per cent of gross profits in the first half of 2016, compared to 9 per cent and 23 per cent in the second half of 2015 respectively. Groupon’s approach to marketing has been focused on online advertising campaigns, traditional advertising, and promotions, which has attracted new customers to the platform. However, Groupon’s issue has never been attracting new customers. Its customer base has grown by 51 per cent over the past five years from 34 to nearly 51 million, but the company has struggled to generate repeat buyers. Gross billing per average active customer has decreased by 10 per cent from $137 in 2014 to $123 in 2016 as a result of Groupon’s inability to foster positive customer-business interactions. With high customer turnover, Groupon’s ability to generate sustainable cash flows is weak.
Couponing Problems
Groupon faces competition from similar market players that replicate its value proposition. The emergence of competitors such as LivingSocial, LiveDeal, and Woot. com forced Groupon to increase its marketing budget and price more competitively. As a result, margins have shrunk from 84 per cent in 2011 to 51 per cent in 2014. With a parity of competitors in the market, Groupon has not been able to differentiate its operations in a significant way.
Couponing is neither unique nor sustainable. Once customers become accustomed to using coupons to buy at a discount, they become less willing to pay regular prices in the future. This notion was illustrated when JC Penney altered its marketing strategy from offering weekly discounted goods to consistent “fair and honest” prices without discounts. The company received backlash from customers who had become used to the feeling of saving, resulting in the failure of JC Penney’s new strategy. Groupon suffers from similar problems, with just 36 per cent of customers spending beyond the deal value upon redemption of the Groupon and only 20 per cent returning to the business for a full-price purchase.
Getting Down To Business
Groupon appeals primarily to small businesses as a marketing platform. Using the platform is seen as a way for business clients to gain exposure to consumers at a low cost with low risk. There are no upfront costs for businesses to offer deals through Groupon, and it bears no liability if the posting is not purchased. However, if a deal is purchased by an end consumer, Groupon takes a minimum of 50 per cent off the face value of the coupon from the client. Because of this, Groupon’s business clients rarely make any substantial profit from the coupons used.
Further, Groupon’s policy of delaying its accounts payable results in a slow repayment cycle that only exacerbates the financial burden placed on its business clients. While these consequences were created from purposely enacted policies, there are business-side issues Groupon did not foresee.
Groupon’s business clients frequently experience negative interactions with individual “Grouponers.” The current Groupon user base is focused primarily on saving money and is not familiar with nor concerned about how small businesses work. They often expect the efficiency and scale of large businesses, and are disappointed with the services received from couponing. Small business owners are also less inclined to prioritize Groupon users over customers who are willing to pay full price; following their first experience, 40 per cent of businesses say they would not offer coupons through Groupon again.
Opportunity To Socialize Online
Online-to-offline (O2O) commerce refers to a business strategy whereby customers are drawn to physical locations through online channel interactions. For example, Uber uses a O2O business model: users hail a ride online through an app and a driver will arrive. On the other hand, O2O socialization can refer to the process by which groups interact online and subsequently pursue real-world social interactions. While there is a wave of online platforms organizing independent users into offline groups, no single platform has fully captured this new O2O socialization process.
Apps like Facebook and Twitter focus on the past and present, sharing past memories or current experiences. On the other hand, future-oriented socialization opens an opportunity for businesses to understand customers’ intentions and take an active role in decision-making for future purchases. By better matching these customers’ future events with business offerings, businesses are more likely to find success with their advertisements. With a range of activities at its disposal, Groupon is in a position to capitalize on this trend. Meanwhile, people join activity-based or fandom communities online to feel connected with other people with similar interests. Connecting these online communities to offline activities through a widely available and connected platform such as a phone can be the next step for O2O socialization.
Building A Stable Base
Focusing on Groupon’s customer retention problem is the best way for the company to recover from its financial woes. The socialization of Groupon will help the company retain the user base that it desperately needs, while differentiating itself competitively. Leading the next wave of online socialization can set Groupon up for the success that so many had originally predicted.
Groupon must refocus its marketing budget on customer retention rather than customer base expansion. Furthermore, the company must pivot from being an online coupon marketplace to becoming the last link in the O2O socialization process. It needs to expand beyond its discount marketplace branding and shift towards new features: smarter suggestions for repeat users, better ways to explore local businesses, and an interface that allows it to become the haven for all online users who ask: “Hey, want to hang out sometime?”
For Groupon to capitalize on “future-oriented” socialization, it needs to appear in more platforms that facilitate O2O socialization. These platforms include websites and applications such as Meetup.com, Like a Local, LocalMind, Bumble, Eventsions, Gravy, and Vamos, and connect like-minded people by suggesting suitable group activities.These apps can be grouped based on three general functions: organizing people who want to meet in person, advising users on local attractions based on crowdsourced suggestions, and sharing events and outings based on the activity of the user’s friends.
“Focusing on Groupon’s customer retention problem is the best way for the company to recover from its financial woes.”
Each of these social network styles have shortcomings. The first, while good at forming groups, lacks the functionality to suggest or plan activities. The second and third, while good at suggesting locations to visit, lack incentives for users to try new activities and do not provide any coupons or discounts.
For platforms specialized in organizing users looking to meet in person like Meetup.com, Groupon should serve as an activity suggestion tool. Initially, it will need to use user-supplied data, provided through questionnaires, combining the interests of group members to make activity suggestions that appeal to the broadest range of people. As individuals in the group continue buying Groupons, the company can use past buying histories to tailor future suggestions for group activities. As suggestions become more accurate, consumers will trust both the social platform and, by extension, Groupon to help make socialization decisions.
For platforms good at suggesting or planning activities, such as LocalMind, Groupon will serve as the incentive for users to follow through with their buying intentions. When an activity or restaurant is suggested, users will be shown Groupon options and can decide what they are interested in exploring. Because these options are accompanied by appropriate discounts, users will be more willing to try a new activity. Furthermore, with its location-based model, Groupon can suggest additional activities for similar businesses or experiences nearby. With this feature, Groupon can be associated with finding local, enjoyable and discounted experiences.
While multiple socialization apps may exist to serve the same area, they are generally varied in purpose. Due to these factors, it is possible for Groupon to partner with numerous platforms without fearing reproach for a lack of exclusivity. On the other hand, by partnering with Groupon, social apps can expect to increase user retention in addition to receiving a portion of profits from transactions.
Lasting Impacts
Groupon can reallocate the marketing budget spent on user base creation by integrating with social media platforms and tapping into pre-existing user bases of platforms it partners with. This would allow Groupon to attract new customers and increase customer retention without investing in an organic strategy. This will increase revenues by two per cent to $6.24 billion while decreasing marketing costs by 75 per cent to $112 million, leading to a two-per-cent increase in gross profits of $2 billion.
Groupon can then reallocate the capital derived from the 75 per cent marketing cost-savings to relationship building and app development.
By tapping into activity-based groups, Groupon can match businesses with customers who have genuine interest in the product or activity offered as opposed to customers who are simply looking for a good deal. The type of customers Groupon can attract will then shift from value-hungry buyers to customers who value the business, improving previously strained relationships between Groupon and its business clients.
By partnering with social apps, Groupon can facilitate users on social networks pursuing real-world interactions. Groupon will use individual interests and buying patterns to suggest local activities. The partners’ social apps and Groupon will each take a portion of the profits, and Groupon will collect multiple sets of buying data from each transaction. All that is left is for people to meet.