Observations on Groupon’s business model – a primer

Christian DahlenMay 2012

With updated remarks on economic characteristics and competitive landscape

www.linkedin.com/pub/christian-dahlen/1/447/4b3

Content of this document

• Business model, revenues and cost• Economic characteristics• Customers• Merchants• Competitive landscape

GROUPON BUSINESS MODEL

Customer signswith Groupon

Deal reaches critical mass

Customers pay Groupon

Payments spread out in 3 installments over lifecycle of deal, leading Groupon with negative working capital

Groupon pays merchant share

Merchant signs up

Customer redeems coupon at merchant

Groupon features

dealGroupon decides which deals are featured in a ZIP code area

GROUPON REVENUE MODEL

Groupon net revenue

# of deals

Net deal size

# of geographies

Categories/ geography

Discounted deal price

Share to Groupon (%)

Gross/ List price

Discount to customers (%)

x

x

xx

Long waiting list of merchants waiting to be featured

Typically 30-50%~ 50%. May trend

downwards due to competitive pressure

Function of category; seems to have increased. Push into travel and hotels

US

international

local

national

GAP, Body Shop

Main deal

Side deals

Groupon stores

New experimental feature

END CUSTOMERS MERCHANTS

• Reduce cost of customer acquisition – already dropping rapidly

• Increase purchasing frequency and repeat buys

• Activate dormant customers who have not purchased

• Less favorable merchant terms

• Reduce cost structure of merchant renewals

• Retention – achieve lock-in through better post deal support

• Enter into national deals with lower cost structure/higher margins

2011 marketing cost: 47% of

revenue

2011 SG&A cost: 50% of revenue

KEY LEVERS TO IMPROVE COST STRUCTURE

ECONOMIC CHARACTERISTICS

• Economies of scale (‘winner takes most’) –Groupon and LivingSocial have been the only start-ups able to raise the massive amounts of capital required for customer and merchant acquisition

• Brand recognition

• High cost of customer and merchant acquisition

• Lack of network effect – each city has to be won separately

• No technology barriers to entry – evidenced by the large number of entrants in 2010

• Low switching cost for merchants and customers – many have tried many providers

• Scaling is expensive - sales people on the ground to educate merchants

Customer demographics • Early adopters: Highly affluent with

disposable income• ‘ Urban females’• 18-34 yrs

Customer benefits• Deep discounts• Discover new services and

merchandise

DEAL PROPOSITION FOR MERCHANTS

Guaranteed revenues Large number of new customers

MERCHANT ECONOMICS

Best Suited Businesses

• High fixed cost businesses• High customer acquisition cost• Repeat purchases• Rice University study:

• 66% of deals successful• Examples: lifestyle businesses,

e.g. spas (82% successful), sailing, restaurants (58% successful), education

• Revenue retention: 50% of the deal minus credit card fees

• Redemption rate: ~80% • Incremental spending: Gap

Groupon value of $50 likely to convert into of $75 to $100 once customer is in the store

• Repeat business: 22% repeat customers

MERCHANT PERSPECTIVE ON CUSTOMER INTERACTION

Merchant

Get customer to follow on

Offer on

Like it on

Respond to

Advertise on

ISSUES FACING MERCHANTS

Long waiting times to be featured

Learning curve in structuring a deal• Too many responses• Too many discount shoppers• Redemption over life time

Switch to other daily deal providers?

CURRENT COMPETITORS PAST COMPETITORS

Only full-size competitor but distant second; ~1/3 size

Hedging strategy; bought aggregator Dealmap and Dailydeal.de

Trials in a few cities terminated after less than one year

3rd largest player sold to Gilt City

2011 saw a massive consolidation - daily deal sites were either being sold/acquired or simply shut down

Owns significant stake in LivingSocial