HBR Likens Groupon to Pets.com

Harvard Business School fellow Rob Wheeler, in a post at HBR, writes:

Groupon’s fundamental problem is that it has not yet discovered a viable business model. The company asserts that it will be profitable once it reaches scale but there is little reason to believe this. The financial results of Groupon’s traditional business continue to deteriorate, especially in mature markets, and new ventures such as Groupon Now also have failed to drive profits…. Groupon maintains a blind faith that growth will be its salvation. As Pets.com learned in the last bubble, such a strategy works just fine until you run out of other people’s money to spend on growth.

Ouch. Pets.com?! I too have my doubts about Groupon’s model. I mean, something got to give. Merchants offer half-off gift cards only because they know most of those gift-card purchasers will never show up to redeem them. The flood of Groupon competitors is also giving merchants negotiating power that’s chipping away at Groupon’s margins. And, after taking a deeper look at the company’s S-1, some industry observers consider Groupon to be a Ponzi scheme that requires growth by new customers to pay off earlier customers (here and here).

On the consumer side, one of two things is bound happen. One, Groupon buyers notice that they rarely redeem the promotions they bought, so they should stop buying them (see Yipit data above). Or two, new Groupon / LivingSocial / Facebook Deals trading platforms such as Yipit, Dealery and MyDeal.ly will put the gift cards into the hands of people who’ll actually use them — and merchants will stop offering such attractive promotions. So Groupon has work to do before it lands on the long-term business model.

But when I think of Pets.com, I think of mail-ordering 50-pound bags of dogfood and wonder who’s going to pay for postage. Except for the exciting fact that you could buy dogfood FROM A WEBSITE!! in 1999, Pets.com didn’t do much to revolutionize the pet supplies marketplace. Groupon, on the other hand, has created a wildly popular service that’s convinced more than 50 million people to subscribe to daily emails from merchants. Given the tens of thousands of deals Groupon pushes out to them each day, I’ve got to believe that Groupon is sitting on a pretty awesome targeting platform for businesses looking for localized marketing opportunities. Those businesses will spend around $16 billion on mobile and online platforms alone in 2011.

So maybe Groupon’s not worth $15 billion or even the $6 billion Google offered, but I think this one’s going to end a bit better than poster children from the last bubble.

  1. # Panama corporation said: September 9th, 2011 at 4:53 am

    ..But these naysayers who are fixated on the current daily deal economics as long-term unsustainable are completely missing the point.The real innovation Groupon brought to the table wasnt in advertising deals per se it was their ability to profit off of closing the attribution loop in online-to-offline commerce. Both are great companies solving problems but only Groupon has closed this attribution loop…Groupon essentially short-circuited what others havent been able to do by inserting itself between the customer and the transaction.

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