Case Analysis Groupon Groupon is an internet website company focused on generating revenue by utilizing relationships with merchants to provide consumers with discounts on select items. The goal of the discounted vouchers is to drive additional consumer store traffic and generate revenue for merchants which are shared with Groupon via a predetermined contractual percentage. Groupon generates visibility and exposure with email and social networking to increase consumer spending at specific merchants.
Groupon has many features from personalization of product offerings to specific demographics and target segments. In addition, a more defined value proposition allowing merchants an opportunity to showcase their own product offerings on the Groupon website. Groupon stands behind every discount voucher sold and distributed. If the consumer is not 100% satisfied the company will provide a refund or financial credit for a future Groupon opportunity. Groupon began with a focus on major city markets and increasing email subscriptions to provide the required visibility to aggressively sell the discounted vouchers.
Groupon evaluated retailers and suppliers and utilized marketing studies to discover the discounted vouchers should be tailored towards activities, dining, salon and spa services, and specific targeted merchandise in relation to the targeted demographics. This distribution accounted for 92% of the merchant category mix. For example consumers in Colorado were more prone to purchasing hiking and outdoor wear versus consumers in New York City. The positives for the retailer and supplier were many local merchants advertising and marketing budgets were minimal to non-existent.In addition, the merchants did not possess the expertise and talent to utilize new media and technology.
With no upfront costs required the initial concept of Groupon was very appealing to merchants. The vouchers would drive new consumer business to the stores for minimal to no advertising expense. Also, vouchers are valued for a specific amount however, the consumer on average spent $20 above the voucher amount adding additional revenue that would not have been received without the Groupon system.The merchants were also allowed the opportunity to designate the timeframe for the voucher, expiration period, and any limits on overall purchases. Groupon honored 100% of any discrepancies.
Groupon’s research data illustrated that 95% of the merchants were happy with the Groupon program, and 96% would recommend the service to others. The negative for suppliers and retailers were Groupon controlled the exact launch date and timeframes for the available purchases. The merchants were required to plan accordingly to staff the product and resources not to affect the normal day to day business.The unknown of when the vouchers would be launched and more importantly utilized, placed a significant burden on small local merchants.
Groupon also processed all online consumer sales and distributed the revenue disbursements in payment installments to the merchants. The payment installments ranged in cycle time from 5 to 60 days. The staggered payment installments would affect the cash flow operations of smaller merchants. The merchants also experienced issues with consumers leaving inadequate tips for restaurant meals. The voucher lowered the overall tab and provided a new base to assess tips.The merchants felt with the unknown and unpredictable staffing and product requirements, the revenue fee that Groupon charged, and the staggered receipt of cash, the overall Groupon idea was not profitable and hurt specific local merchant businesses.
Groupon focused on local merchants for discounted vouchers. Occasionally, Groupon would target major promotions for national brands offering discount vouchers. This would increase the Groupon brand awareness and subscribers, however negatively affect the smaller local businesses pushing critical consumer revenue away from local restaurants, and merchandisers.For example the timing of the vouchers from national brands would be utilized on weekends and holidays, taking away critical revenue from local merchants at critical times. Finally, the consumers that utilized Groupon on a recurring basis were able to spend exactly what the voucher offered and did not provide recurring business to the merchant.
The overall goal of the merchant was to gain exposure and recurring customer traffic and revenue based upon initial discount vouchers. This did not hold true for many merchants, as the Groupon voucher was utilized and customer retention was non-existent.Groupon targeted consumers with emails, and social media exposure such as Twitter and Facebook. Advertising relied on word of mouth from friends and families, and referral vouchers. Groupon also engaged in marketing campaigns related to gimmick consumer challenges to drive activity in an attempt to increase email subscribers.
The positives of Groupon to the consumer were the perception that products and services were being acquired and utilized for a discounted price. The perception that a consumer was receiving a discounted deal was very appealing.Groupon targeted a broad market to increase revenues. Upon review and analysis the targeted market was focused on 18-34 year old, single females with income of $70K and above. The targeted consumer would be employed, and have higher education credentials. The focus on singles allowed additional flexibility to utilize vouchers with limited notice and planning.
The higher than average disposable income allowed Groupon to focus on providing discounts on items that consumer could afford and generate social interest and interaction with other consumers.Purchasing an item as a luxury for a discounted price increased consumer confidence and self-esteem. For example providing discount voucher for white water rafting would allow the consumer the opportunity to perform a healthy outdoor function and interact with other consumers. The negatives aspects for the consumers were the ability to acquire the discounted vouchers due to their disposable income allocations, however then not utilize the voucher. The consumers experienced buyer’s remorse for items initially viewed as interesting and exciting, then the fad wore off and the vouchers were not utilized.
Groupon estimated that non-redemption rates were in the 10-30% range. An additional negative was the perception that one had to utilize a voucher similar to a coupon to afford the product or service. The coupon stigma illustrated a negative impression. Groupon’s business model requires significant advertising and marketing expense to create consumer awareness. The company’s growth in the US and internationally has diluted the overall brand versus strengthening. The training of the sales team is limited and poor, and customer service and IT failures have provided negative exposure.
The poor delivery has a negative effect on Groupon. The major negative factor to Groupon’s longevity is the minimal barriers to entry. Competition is fierce and major telecom players Google, Microsoft, and Facebook are developing their own type of discount voucher system. The telecom companies have the clients via social networks and email users. Groupon is strictly relying on the consumer experience will drive additional repeat business. Groupon’s lack of planning for innovation will soon experience significant hardships in customer retention and expansion.
The outflow of cash for market and advertising expenses far outweigh the incoming revenues being shared with Groupon. In addition the merchants will get offered better deals related to exposure, timing of release and revenue sharing from the telecom companies with the larger number of email subscribers. I have severe doubts the business will continue to grow based upon competition. The recording of revenue and expenses are another major challenge that accounting firms are evaluating and questioning. Perception is reality and the perception is Groupon is hiding expenses and allocating revenues incorrectly.
