Groupon Case

9-511-094 REV JUNE 13, 2011 SUNIL GUPTA RAY WEAVER DHARMISHTA crucifix Gro oupon n e as of On November 29, 2010, the technology indus screen wa buzzing with rumors o Googles bid for Group pon, a two-y year-old meshing b grade that pro omoted d disordery messs protrudeeri y ing deep dis scounts from local anesthetic merch hants. Google accountly take awayered at lea $3 billion, eclipsing a r e o ast stir $2 billion bid from Y Yahoo. And as Groupon re a esisted, Goog quickly rai gle ised its offer t as much as $6 billion. 1 to s Ind dustry expert and financ analysts were sharply divided on Googles mo and Grou ts cial w y ove upons poten ntial value. A multibillion A n-dollar valua ation for a com mpany that is in a busines with virtua no s ss all(prenominal)y barrie to entry an is junior than my tod ers nd r ddler is absurd Forrester Research reta analyst Su d, ail uchitra Mulpuru said blun 2 David Kirkpatrick, a former Fort ntly. K bank line magazin columnist, sniffed, Gr o ne oupon isnt level a techn nology union, for goo odness sake. Its a discou unter that ha appens to us the se Intern net. 3 Bu other(a)s rega ut arded the troupe highl emphasizi ly, ing its specta acular growt Forbes cro th. wned Group pon the fast test growing troupe ev ver,4 while m media indust veteran a try and journa reheel John t Battel marveled, Ive never seen anything like itwe since Goog And comely as Google la lle s g ell, gle. t apped the Ye ellow Pages in a fraction of the m, Gr n roupon seems to be on trac to do the sa s ck ame to Googl 5 le. At the halt of a frantic week, Groupon surprised m t n many observe by rejecti ers ing Googles offer. Shortl after, the company anno ly ounced that it had raise $ $950 million f from private investors, and was d ruto a greater extentd to be laying the groun ndwork for an initial publ offering.T events pr a lic The rompted a br passageer debat c stand whether atomic follow 14 Valleywhic had recent seen very high valuati te V ch tly y ions for Face ebook, Twitte and Zyn er, ngawas sho owing takes of a nonher b bubble. Jeff Clavier, man naging partn at ner SoftTe VC and a sound-kn have got angel inves ech n stor, predicte There m non be a b implosion tho ed, whitethorn huge n, down the road there will be a bu n unch of blood and tears. 6 d Com mpany Origins Gr roupon, a por rtmanteau of the words group and f coupon, gr rew step up of Th Point, an o he online comm munity for col llective action The locate hel n. ped population p propose and promote soci cantonmentaigns such ial s as com mpany boyco and chari fundraiser Each camp otts ity rs. paigns creato specified i tipping p or its point, the pa articipation le evel that was required befo supporter were called to act. The ti ore rs d ipping campaignur was re _______ _______________ _______________ ________________ _______________ _______________ _______________ ________________ ______ Professo Sunil Gupta an Ray weaver an Research Asso ors nd nd ociate Dharmishta Rood prep ard th effort. The auth his hors give thanks Paul Bu utler for contribu uting to online dat collection.This case was develope from published sources. HBS case are essential solely as the basis f class ta c ed es for discussi ion. Cases are not in nt stop to serve as endorsements, sources of primary d s data, or illustrations of takeive or inefficient manageme s ent. Copyrig 2011 Presiden and Fellows of Harvard College. To order copies or request permission to reproduce ma ght nt H T n aterials, call 1-800-5 545-7685, write Ha arvard business enterprise School Publishing, Bo oston, MA 02163, or go to www. hbsp o p. harvard. edu/edu ucators.This human beingsa ation may not be d digitized, photoco opied, or otherwise reproduced, poste or transmitted, without the permis ed, w ssion of Harvard Bu usiness School. This papers is genuine for riding ha irregular unsharedly by Boshen Wang in MACC 402 Groupon taught by William Forster from s waggering 2011 to celestial latitude 2011. For the undivided consumption of B. WANG 511-094 Groupon de subscribe to allocate the partnerships resources unless when a campaign had broad support. It as well gave advocates of a sire an incentive to recruit others. The Point was founded in 2007 by Andrew mason, then a masters student in public policy at the University of loot.When an investor approached him with a funding offer, Mason subsided to drop out of rail and focus on the project full- snip. scarcely with an audience too teensy for advertising to sustain it, The Point ab initio struggled to ca exercise receipts. Then Mason discover that many of the most popular campaigns banded consumers to bug outher to dumbfound volume dismisss from retailers. He decided to try pre-arranging correspondent deals and promoting them on the site for commissions. 7 The experiment was such a succeeder that in November 2008, it was spun off as a separate business, with 27year-old Mason its Founder and CEO.Two hallmarks of Groupona focus on local merchandisers and a self-imposed limit to a single promotion separately daylightwere designed to cope with stripped scale and resources. Mason explained Have a different offer but exactly star every day so our very small community will still be large exuberant so that if we origin it all into one thing well be able to achieve the unfavourable mass that we need in order to manufacture a success. Thats part of why we went local. It became possible to go around to the masses in our office building for starters. We kicked it off with just 500 slew that we got signed up on our transporting list. Sales representatives began pitching merchandisers crossways Chicago on the idea of promoting their businesses by selling aggressively discounted coupons for work to Groupons customer stupid. In return, Groupon would take a cut of each sale. The concept resonated with both business proprietors and consumers, and Groupon quickly expanded to other cities, source with Boston, sassy York, and San Francisco. After six months, the company had run more than ampere-second deals and had acquired 60,000 electronic mail readers. 9 Running and breaketing Groupon Promotions Merchant Profiles and SalesTo generate deals, Groupon initially relied on an inside sales team in Chicago that called on local merchants around the country, closing business everyplace the speech sound and email. Over time, it also began building an outside sales force of grievance executives based in local markets, starting with large population centers and other cities in which its business had grown rapidly. Though Groupon have a unspecific variety of businesses, some themes emerged. Services predominated, though deals for overlaps were not un crude, especially baked goods and other foods.There was a strong emphasis on leisure, sport and recreation (Table A), and occasionally on novel experiences such as meat cleav er tours and exotic car rentals. Utilitarian profits were less popular. unrivaled advance(prenominal) flop was pet daycare We learned over time that people dont want to experiment with who is watching their animal, a company spokesperson explained. 10 2 This enumeration is countenance for physical exercise provided by Boshen Wang in MACC 402 Groupon taught by William Forster from gilded 2011 to celestial latitude 2011. For the exclusive hire of B. WANG Groupon 5 511-094 Table A e Merchan Category Mix nt MCategory C Activities A Dining D Salon & holiday resort S Merchandise M Membership (e. g. Gym) M Tourism T Hotel H % of visions 29% 28% 20% 15% 7% 1% 1% seminal fluid Steve Carpenter, What sucks Groupon Tick, TechCrunch, Ma 2, 2010. Based on analysis of a deals run in Q 2010. s ay d all Q1 A stare cond ducted by mar rketing servic firm Merc ces chantCircle fo ound that loca businesses vistad al a vari iety of challen nges in reach hing customer For one th rs. hing, t hey had very sealed b d bud lounge abouts more than e half of the 8,500 bu o usinesses surv veyed fatigued le than $2,50 on marketi annually. They a lot lacked ess 00 ing . he expertise to adopt sassy media and te a m echnologies ( guess A). Consequentl the lure of an ly, outsourced online promotion with no up-fro set down w compellin And comp w ont was ng. pared to tradi itional adver rtising, Group pons impact was relatively belatedly to obse w y erve and mea asure. Figur A re Local Business Mark B keting Budgets and Preferr Outlets red Facebook or other societal me edia pro? le Online yell low pages or local n currents site Custom emails mer Blog Print yell low pages Direct mail D Print n saucilyspaper 0% 10% 20% 30% 4 40% 50% 60% 70% theme MerchantCircl Merchant Con le nfidence Index su urvey, February 2 2011.Prepa aring the De eal When a merch hant signed on for a prom o motion, it wo orked with G Groupon to d decide the sp pecific produ or service to be offered and i ts disco uct d ounted wrong, ordinarily at least 50% of list. As wit The , ff th Point companionable camp s paigns, the de was valid alone if the nu eal umber of buy yers achieved a tipping poi set int by the merchant. Other terms included the vouchers ex e O xpiration date and, in som cases, lim on e me mits 3 This papers is authorized for use solo by Boshen Wang in MACC 402 Groupon taught by William Forster from imperious 2011 to celestial latitude 2011. For the exclusive use of B. WANG 11-094 Groupon individual or total purchases. Groupons standard agreement was a 50/50 split of voucher revenues, but merchants sometimes negotiated better terms. Groupons newspaper column staff wrote advertising copy to promote each offer. Their descriptions were intended to be entertaining as well as informative, often striking an overbold and offbeat tone. 1 premature deal for a Swedish massage, for example, was accompany by a FAQ that read Q Where is Sweden? A Sweden is a moon villa ge where aliens create been teaching the Statesn astronauts advanced massage technique for hundreds of long time. Q What is so special active a Swedish massage?A maiden of all, the technique comes from outer space. Second of all, it is very advanced. Finally, it relieves the body of lots of stress. Q How outsized are the masseuses hands at Lincoln Park Massage? A Good question, for hand size is extremely important in massage. Theyre a size 25 on total. Q Thats not like, revoltingly large monster hands, is it? A No, thats just a myopic above average for humans. Perfect for masseuses. Q Theres gotta be a catch. Where is the fine print? A There is no fine print. here(predicate) are the completely reasonable stipulations on todays deal in totally normal size print.The deal terms, ad copy and an accompanying photograph were then assembled for online presentation (see video display 1 for an example, and expose 2 for representative deals in selected cities). Groupon scheduled pro motions according to merchant preferences, though it sometimes committed only to a launch windowpane rather than a specific date. Running the Deal Consumers signed up at Groupon. com to get their citys daily deals, and could request notifications via email, Facebook or Twitter feeds. Each deal was affix online at midnight outgoing alerts followed in the early morning.Most Groupons were uncommitted for purchase for only 24 hours, and a virtual hourglass counted down the remaining time. The deal page also showed a running tally of vouchers sold throughout the day. Groupon processed consumers online transactions, then remunerative out the merchants cut of the revenue in trio equal installments 5, 30, and 60 days later. Online accounts contained each subscribers available Groupons, which could be printed in advance or presented to the merchant on a smartphone. Groupons for online stores included a unique code to be entered at checkout.Although the abundant majority of Groupons feat ured local businesses, subject brands were occasionally promoted with deals that were coordinated crossways cities. Groupon ran its head start such deal in August 2010 with The Gap, offering $50 worth of merchandise for $25. It was a huge hit, generating $11 million on sales of 445,000 units. 11 Subsequent offers from Nordstrom Rack and Barnes & Noble were even more popular. And in February 2011, a deal touting new routes on Virgin America sold out in eight minutes. 12 These big promotions generated buzz that increased Groupons brand awareness and motivated new customers to sign up. This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to celestial latitude 2011. For the exclusive use of B. WANG Groupon 511-094 Groupon Subscribers Marketing Groupon to Consumers some people first learned about Groupon when friends or family alerted them to deals through email and brotherly media. To encourage this word of mouth, G roupon gave customers $10 toward a future purchase for each referral. 13 It also set up an affiliate market syllabus for bloggers and websites to earn commissions of up to 15% on referred traffic. 4 Facebook and Twitter were Groupons top referring sites, accounting for 44% and 8% of traffic respectively in January 2010. 15 Groupon also got attention for a contest in which one customer was challenged to Live Off Groupon for an entire year. This Groupawn would be provided an unlimited tack on of Groupons for things to eat, do, and buy across America, but could not spend any cash. If successful, he would win a $100,000 prize. Several hundred hopefuls applied, and 28-year-old Chicagoan Josh Stevens was chosen as the winner. Stevens began the challenge in May 2010, posting updates and pictures in various social media along the way. 6 Over time, Groupon began supplementing these efforts with paid advertising, spending heavily on Google AdWords and AdSense. And in February 2011, the com pany launched its first TV campaign with a highly Bowl ad, for which each spot cost a reported $3 million. 17 The campaign tried to capture Groupons quirky esthesis of humor, but became a lightning rod for controversy. Each spot featured a celebrity who first appeared to be promoting a social or political cause, then segued into a Groupon endorsement. Actor Timothy Hutton, for example, intoned The people of Tibet are in trouble. Their very culture is in jeopardy.But they still scald up an amazing fish curry. And since 200 of us bought at Groupon. com, were getting $30 of Himalayan food for just $15 at a Himalayan restaurant in Chicago. Many people took offense, accuse Groupon of trivializing and exploiting the Tibetans plight. Although Groupon was the second-most mentioned Super Bowl advertiser in online discussions, much of the conversation was unflattering negative sentiment relegate from 10% in January to 60% the day after the game. 18 One viewer tweeted, Groupon seems to h ave achieved the unique feat of paying $3M to lose customers who previously coped them. 19 Mason initially defended the campaign as tongue-in-cheek, but when criticism persisted, he decided to clout the ads. 20 Consumer Response Groupon became very popular among a customer base that tended to be young, well-educated, unmarried, and relatively affluent. Over three-fourths of subscribers were women (Exhibit 3). Consumers enthuse not only about the money Groupon saved them, but also about its convenience, variety, and other benefits. I Love Groupon From my first purchase, I have been hooked. I have purchased several(prenominal) Groupons and have never had a problem redeeming them.The merchants have endlessly been appreciative of my participation in the Deal. 21 I think Ive gained weight trying all the restaurant and bakery deals But thats where the cycling and exercise deals come in, along with some pampering specials. Im on a wellbalanced Groupon diet 22 5 This document is authoriz ed for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupo on Groupon al llows me to dis pout even d nts/activities in NYCIm a tourist in my hometow m wn 2 th hanks to this savvy group. 3 s Redem mptions cautionary cally began with a big su w urge in the f first month a after a deal w run, the was en declined to a fairly stea t ady, cut back rat and finally spiked again shortly befo expiration (Figure B). te, y n ore n Figure B Typical Gro oupon Redem mption Pattern n inauguration Me erchant Welcome Guide, downloa e aded from www w. groupon. com/p pages/day-of-yo our-feature. But so ome vouchers were never used. Buye sometime reported fe s r ers es eeling Grou upon remorse e when offe that had seemed irresi ers s istible became less appeal ling in retrosp pect.One Ch hicago residen nt recalled th hinking, Wh doesnt wa a Segway tour? as he spent $clx for four tick ho ant y e kets , only to let them expire because he never got around using them. And a Boston wom with $25 in voucher h a g man 50 rs from vario group bu ous uying sites lam mented, Ther just isnt en re nough time in the day to d it all. I nauseous n do de a spreads sheet, and its so sad, the eyre all com ming due. Gr roupon didn disclose no t on-redemptio on rates, but various estim copulate put the number betw e ween 10 and 30 percent. 4 Many state l laws, howeve er, stipulated that vouchers could be re d edeemed for their purchas price after e t se expiration, of ften for several years. Th remedy was explaine on Group his w ed pons websit though it was unclea how man te, t ar ny consumer were aware of it. rs e Value to Merchan t nts Positive Reactions R Many merchants he eartily endors Groupon for its ability to raise awa sed y areness, increa traffic, an ase nd 25 acquire ne customers Among them was Gerric Adachi, ow ew s. ck wner of Aiea G Grill in Portla and, surgery2 The concept is shee r genius The web-s e s. avvy, interac ctive format is so well th hought out forwar and backw rds wards. Who ever heard of acquiring 51 new, quali customers in one day e f 16 ity with no money up front? You were also righ about the G n w ht Groupon mem mber being a high grade custom mer, operatin at a sop ng phistication level far ab bove that o the typic of cal bargain hunter r/coupon cutter. Bill Ra aupp of San Diego Desserts concurred There is cle D early no othe pro yard th creates th er hat his brand aw wareness, with a affirmatory direct effect to my bottom line.Groupo far outweighs any othe h d o m on er 26 advertisin or free adv ng vertising prog gram out there e. 6 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG Groupon 511-094 American set ran a popular deal in which it offered $50 worth of clothing for $25, selling 133,000 vouchers. Afterwards, a c ompany insider listed several positive effects. starting time, customers spent an average of $20 above the vouchers face value when cashing in the deal. The promotion also attracted many new customers The slayer was email address acquisition. We converted approximately 25% of in store redemptions into signing up for our email list which is on pass over to generate an additional five to six figures in online revenue. Finally, American Apparel negotiated a contract that gave Groupon much much less than half of the voucher revenue. 27 Negative Reactions Despite such enthusiasm, Groupons effect on merchant profitability was hotly debated.One wellpublicized critique came from the owner of Posies Bakery and Cafe, who called using Groupon the single worst decision I have ever make as a business owner I told the Groupon sales representative we would have to get at least 50% to cover our cost of product. What I didnt think clearly enough about was that that margin we mark up is what cove rs all of our other costs like staff, rent, utilities, etc. Our overhead is roughly $25,000/month, and this decision was about to make it so that we didnt cover any of those other costs. We met many, many grand new customers, and were so happy to have them join the Posies family.At the same time we met many, many terrible Groupon customers customers that didnt follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who atilt based on what they owed (10% of $0 is zero dollars, so tossing in a dime was to them being generous). After three months of Groupons coming through the door, I started to see the results unfeignedly hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. 28 U.S. Toy, a retailer in Kansas urban center, was also unsatisfied. It offered $20 worth of merchandise fo r $10, half of which went to Groupon. Customers snapped up 2,800 coupons, but managers became discouraged by their shopping patterns. Co-CEO Jonathan Freiden said, It didnt drive in new people, and the people that were coming in didnt spend even our average sale. It was just sad. He estimated that U. S. Toy lost money on three-quarters of the transactions, and that 90% of purchasers were animated customers. 29 Profit Drivers It became clear that the success of any circumstance daily deal depended on a ariety of factors, including the mix of new versus existing customers, upside spending at the time of redemption, and success in converting discount buyers into symmetrical customers. Several surveys tried to measure these and assess merchant satisfaction, often with contrasting results (Table B). b a American Apparels thoroughgoing(a) profits averaged 53% of sales, according to MSN Money. b Customer mix was not measured in any of these surveys. It was believed to vary widely, but a common assumption was that half of Groupon buyers were new customers. 7This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupon Table B Merchant Surveys about Experiences with Groupon and Other periodic Deals Merchant Responses non reported 80 150 1,568 Promotional Partner(s) Groupon Groupon and others Groupon Groupon and others disbursal Over Face Value avg redeemer spent 60% over face value Not asked 41% of redeemers exceeded face value Not asked % of Redeemers Who Made 1+ Repeat Visit 22% 19% 25% Not asked % of Merchants Who Would Run Another Deal 95% 93% 57% 45%Source Groupon Yipit daily deal aggregator Rice University marketing prof. MerchantCircle Sources www. grouponworks. com/why-groupon Ian Sherr, Online Coupons Get Smarter, The Wall Street Journal, August 25, 2010 Jim Moran, Local Social calling The Explosion of Group Buying, blog. yipit. com, August 19, 2010 Utpal Dholakia, How Effective Are Groupon Promotions for Business? , family 28, 2010 MerchantCircle Merchant Confidence Index survey, February 2011.One cartoonist, poking fun at business owners potential naivete, summed up the dilemma this way while Groupon may bring in lots of customers, merchants might lose money on every sale (Exhibit 4). Groupon, however, argued that bad outcomes were rare 95% of merchants it surveyed were satisfied with their Groupon experience, and 96% would recommend it to others. 30 And in August 2010, the company reported a waiting list of 35,000 businesses. 31 Aggressive Growth Encouraged by its early success, Groupon expanded rapidly, replicating its assume in new markets. By the end of 2009, the company operated in about 30 U.S. and Canadian cities, and business seemed to be booming in nearly every location (see Exhibit 5 for a sample). In 2010, Groupon set its sights on foreign territories, primarily by acquiring companies that ha d copied its model in their home countriesfirst in westbound Europe, then South America, then Asia and elsewhere. The pace of this expanding upon was perhaps strange a little more than two years after its founding, Groupon had trading operations in more than 500 markets in 43 countries (Table C). One media way out marveled, We cant think of a companyeverthat is so aggressive about going international so big, so fast. 32 The urgency was driven in part by the sense that an early mover could establish a lasting advantage. But some observers questioned Groupons ability to leverage its brand and experience overseas. 8 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG Groupon 511-094 Table C Groupons Expansion discover Nov 08 Mar 09 Jun 09 family line 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Countries 1 1 1 1 1 1 18 29 35 43 Cities 1 2 7 18 28 40 150 230 300 500 Subscribers (Worldwide) Savings to Datea (North America) 50k 700k 1. 7M 3M 6M 13M 50M 60M $4. 5M $18M $42M $100M $285M $400M $900M a Aggregate consumer nest egg on Groupons sold in North American markets. Aggregate oecumenic savings were $1,800M as of environ 2011. Source Compiled from company press releases archived at www. groupon. com/press. These acquisitions were funded in part by several rounds of venture capital financial backing $30 million in December 2009, $135 million in April 2010, and $950 million in January 2011. As a result of its efforts, Groupons revenue exploded from $33 million in 2009 to $760 million in 2010. 33 Still, significant upside remained only 6. % of respondents to the MerchantCircle survey had run a Groupon promotion, with some other 13% provision to do so in the coming months. And the local advertising market was estimated at $100 billion in the U. S. alone. 34 Growing Pains Groupons growth created significant management challenges, not least of which was the training and integration of newly hired and acquired personnel. The company ended 2010 with over 4,000 employees, up from just 120 the year before. 35 By comparison, Facebooks employee count was less than 100 after two years in business, and around 2,000 in early 2011.This environment occasionally contributed to service failures and other snafus. One Groupon in Yokohama, lacquer marketed home supporty from a local restaurant of osechi, a traditional New Years meal. Demand overwhelmed the business, and many osechi sets arrived late or in poor condition. In response, Mason posted an apology on YouTube, conceding that his company had really messed up. Customers were given refunds and credited 5,000 yen toward future purchases. 36 Another fortuity involved an FTD Valentines Day promotion.When browsing FTDs website to redeem their purchases, customers noticed flower arrangements with sale prices (for which their vouchers werent valid) below the Groupon discounted pr ice. Some accused FTD of overstating its retail prices to make the offer seem more attractive. FTD and Groupon denied this and called the situation a misunderstanding. Again, refunds were offered to the touch on customers. 37 Groupons also sometimes adversely affected a merchants regular patrons, as one customer expressed in an online vent I go to a Sushi bar who has offered a Groupon promotion.When I arrive there, I encounter a busy, under-staffed, ran-out-of-menu items restaurant where my full price is subsidizing the half-off diners who have destroyed a perfectly fine business for the abutting few days after the 9 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupon Groupon offer. It works for merchandise. For services, a Groupon success is a curse for regular customers/patrons. 8 To alleviate such problems, Groupon undertook a variety of measure s, notably the expansion of its customer service organization to 1,000 employees. The company also rolled out new services to help merchants run promotions smoothly, including a capacity planning tool and a smartphone app for voucher verification and redemption. 39 Widespread competition For all Groupons acclaim as a web nearmedia had hailed it as the next web phenom40 and the it digital phenomenon of the moment41the operation was at its core remarkably simple. Groupon neither held inventory nor carried out fulfillment, relying alternatively on its merchant partners. frequently of the technology requiredemail broadcasting, transaction processing, and a website that was fairly basic by Web 2. 0 standardswas mature and fairly cheap. In principle, nearly any organization with a customer database and a business sales function could offer its own daily deals. Accordingly, competitors sprang up in droves, numbering nearly 300 in the U. S. by early 2011. 42 Many closely imitated not only Groupons business model, but its look and feel as well (Exhibit 6). The largest of these rivals was Washington, D. C. -based LivingSocial.Although significantly smaller than Groupon, LivingSocial was also growing rapidly, and in January 2011 got a big boost by promoting $20 Amazon gift cards at half off. (Amazon had recently invested $175 million in the company. 43) Nearly 1. 2 million customers took the deal. By defect, LivingSocial had 24 million subscribers, and was operating in more than 200 cities across 11 countries. 44 Established e-commerce properties also scramble to participate in the daily deals phenomenon. Some of these served particular niches, such as OpenTable (restaurants), The Knot (wedding services), and Travelzoo (travel).A cottage industry of aggregators also emerged. These sites sourced no deals themselves, instead collecting and presenting a summary of others offers to earn commissions on referred traffic. But condescension the onslaught, Groupon held a dome stic market share of over 50%. 45 Some competitors tried to win merchants over by offering lower fees or leveraging other media. One of these was Double retort Deals, launched by limiter Magazine, Americas largest distributor of local coupon magazines. The owner of Haydn Zugs restaurant in Lancaster, PA, was persuaded. When I learned that Double Take Deals could pay out a higher percentage than Groupon, he said, I was intrigued. But when they offered me a free full-page ad in Clipper Magazine too, it sealed the deal. I knew that was something no one else could offer. 46 But perhaps the biggest threat came from the web heavyweights. Spurned by Groupon, Google began developing a competing service of its own called Google Offers. Industry experts expected Offers to promote deals that were relevant to a consumers current location, tying them to mobile phones and Google Maps (Exhibit 7). 7 Similarly, Facebook launched a location-aware product called Facebook Deals. It offered merchant s a menu of promotions to suit different objectives, such as attracting new customers or encouraging repeat visits (Exhibit 8). Groupon 2. 0 To stay ahead of competitors, Groupon was developing a variety of innovations, sometimes collectively referred to as Groupon 2. 0. One of these was Groupon Stores, which enabled merchants 10 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011.For the exclusive use of B. WANG Groupon 511-094 to set up virtual storefronts on Groupons website. From its store, each merchant could launch selfservice deals of its choosing, dictating the number and frequency of offers (Exhibit 9). Groupon took a commission of 10% of sales, rather than its customary 50%, on these promotions. Because this meant that consumers would have access to more than one deal at a time, Groupon created Deal Feed to collect and personalize each subscribers current offers. But the reception for thes e was lukewarm.One industry insider, noting that Groupon had gently removed the My Deal Feed link from its navigation header, speculated that Groupon Stores was dead on arrival. 48 A more ambitious initiative was Groupon Now. Its visionsimilar to those of Googles and Facebooks new productswas to offer just-in-time, hyper-local promotions on GPS-equipped smartphones. Groupon Now featured a simple two-button interface Im Hungry and Im Bored. The product was still in trials, but Mason made his ambitions clear It makes Googles market look quite small if we get it right.Its really tapping into the largest part of commerce in the U. S. local. 49 flavour Ahead In a little more than two years, Groupon had alter from an unknown startup into a global enterprise with 6,000 employees in more than 40 countries. A few months after Groupon turned down Googles $6 billion offer, Bloomberg Businessweek reported that the company was in negotiations with bankers for an initial public offering that c ould value the company at $25 billion. 50 To some, Groupon appeared to be an unstoppable juggernaut.But detractors rattled off a laundry list of concerns. Could Groupon maintain the high fees it extracted from merchants? Would it be able to fight off Google, Facebook, and an ground forces of copycats? Was the daily deals phenomenon a hot fad that would inevitably undisturbed off? Some even questioned Groupons fundamental business model did it deliver lasting value to merchants? Forresters Suchitra Mulpuru warned, Everyone thinks this hyper growth is going to continue. If these merchants come to go through these consumers are not coming back, theyre not going to do more Groupons.And if they dont do more Groupons the whole model falls apart. 51 Andrew Mason was acutely aware of these risks, laying them out in a 2010 year-end internal memo that cautioned his employees against complacency and challenged them to prepare Groupons place among the great Internet businesses52 Not only mu st we continue to beat the thousands of clones who lifted our idea and began at roughly the same time as we did, but now we must also beat the biggest, smartest technology companies in the world. They are coming HARD.If you feel a little like Frodo climbing Mount Doom, you cant be blamed. Is it hopeless? How can we avoid the fate of the Internet darlings before us Yahoo, MySpace, Friendster, AOL that crashed as magnificently as they rose? Companies dont lose to competitors they lose to themselves. MySpace lost to itself, not Facebook. MySpace essentially handed Facebook the keys to the castle by devolving into a service that wasnt delighting its customers. For whatever reason, it got stuck. It stopped innovating.By this time next year, we will either be on our way to beseeming one of the great technology brands that define our generation, or a cool idea by people who were out executed and out innovated by others that were smarter and harder working. 11 This document is authorize d for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupon o Exhibit 1 Example occasional Deal D Source Gro oupon. com. 12 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011.For the exclusive use of B. WANG Groupon 511-094 Exhibit 2 Deal Profiles for Groupons Run in Various Cities Median Deal Terms City Austin, TX Boston, MA Charlotte, NC Chicago, IL Kansas City, MO Omaha, NE Phoenix, AZ San Francisco, CA Tampa, FL Vancouver, BC Launch Date Sep 2009 Mar 2009 Oct 2009 Oct 2008 Nov 2009 Feb 2010 Aug 2009 Jun 2009 Sep 2009 Apr 2010 Voucher expense $43 $42 $32 $37 $31 $29 $33 $42 $28 $46 Retail Value $110 $109 $86 $94 $90 $85 $96 $106 $82 $116 Tipping Point 59 94 25 130 51 24 37 56 42 54 Months Valid 5. 7 7. 6 7. 7 7. 3 7. 4 6. 6 7. 1 8. 1 7. 7 6. 9Source Compiled by case writers from deals run 10/08 12/10, archived on Groupon. com and ThePoint. com. 13 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupo on Exhibit 3 Groupon User Demogra U aphics Source http p//www. group ponworks. com/w why-groupon/demographics. e 14 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG Groupon 511-094Exhib 4 bit A Cart toonists Take e Source tom Fishburn Marketoonist. com. ne, 15 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupon o Exhibit 5 Quarterly Results in Sel R lected Cities Source Com mpiled by case writers from arch w hived deal results on Groupon. co m and ThePoint s o t. com. 16 This document is auth orized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B.WANG Groupon 5 511-094 Exhib 6 bit Some Competing Daily Deals C D Sources LivingSocial. com, BuyWithM s Me. com, and GiltCity. com. C 17 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupon o Exhibit 7 Sample De from Goog Offers eal gle Source http p//techcrunch. c com/2011/01/25 5/sneak-peak-google-offers/. o 18 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011.For the exclusive use of B. WANG Groupon 511-094 Exhib 8 bit Facebo Deals ook Source http//www. f facebook. com/deals/. e 19 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANG 511-094 Groupo on Exhibit 9 Groupon Stores S Source http p//www. group pon. com/merchants/welcome. a 20 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B. WANGGroupon 511-094 Endnotes Evelyn Rusli and Claire Miller, Google Is Said to Be Poised to Buy Groupon, DealBook, The New York Times, November 30, 1010, http//dealbook. nytimes. com/2010/11/30/google-is-said-to-be-close-to-buyinggroupon/? ref=grouponinc, accessed December 2010. Evelyn Rusli and Jenna Wortham, Google Gambit for Groupon Raises Concern, DealBook, The New York Times, November 30, 2010, http//dealbook. nytimes. com/2010/11/30/googles-gambit-for-groupon-raisesconcerns/? partner=rss&emc=rss, accessed December 2010. 3 Tiernan Ray, Does Googles Groupon Deal Make Sense? Barrons, December 4, 2010, http//online. barrons. com/article/SB50001424052970204033804575645052537926526. hyper text mark-up language? mod=BOL_twm_col, accessed December 2010. 4 Christopher Steiner, Meet the Fastest Growing Company Ever, Forbes. com, August 30, 2010, http//www. forbes. com/forbes/2010/0830/entrepreneurs-groupon-facebook-twitter-next-webphenom_2. hypertext markup language, accessed February 2011. 2 1 John Battelle, Thinking Out Loud Whats Driving Groupon? businessinsider. com, December 19, 2010, http//www. businessinsider. com/battelle-groupon-2010-12ixzz1CGRvk7Sb, accessed February 2011.Jenna Wortham and Evelyn Rusli, A Silicon Bubble Shows Signs of Reinflating, DealBook, The New York Times, December 3, 2010, http//dealbook. nytimes. com/2010/12/03/a-silicon-bubble-shows-signs-ofreinflating/, accessed December 2010. Christopher Steiner, Meet the Fastest Growing Company Ever, Forbes. com, August 30, 2010, http//www. forbes. com/forbes/2010/0830/entrepreneurs-groupon-facebook-twitter-next-webphenom_2. html, accessed February 2011. 8 9 7 6 5 Ibid. Groupon Saves Consumers More T han $1 gazillion in Less Than Six Months Chicagoans, Bostonians Save Big Using Daily Discount Website, Globenewswire. om, April 22, 2009, http//www. globenewswire. com/ newsroom/news. html? d=163568, accessed February 2011. 10 Daily Deals Dissected Where the universal Offers are and Who is Buying, mint. com, December 24, 2010, http//www. mint. com/blog/trends/groupon-12142010/, accessed February 2011. 11 Wailin Wong, Gaps Groupon Pulls in $11 Million, ChicagoTribune. com, August 20, 2010, http//articles. chicagotribune. com/2010-08-20/business/sc-biz-0821-groupon-20100820_1_gender-and-zipcode-chicago-startup-coupon-site, accessed February 2011. 12 Owen Thomas, Can Groupon Take to the Skies with its First Airline Deal? venturebeat. com, February 17, 2011, http//venturebeat. com/2011/02/17/groupon-virgin-america/, accessed February 2011. 13 New on Groupon Referral Rewards, goupon. com, October 5, 2009, http//www. groupon. com/blog/ cities/new-on-groupon-referral-rewards/, accessed F ebruary 2011. 14 Groupon Collective Buying Power, groupon. com, http//www. groupon. com/pages/affiliates, accessed February 2011. 15 Lindsay Steinbach, Do You Groupon? blog. compete. com, March 10, 2010, http//blog. compete. com/2010/ 03/10/do-you-groupon/, accessed February 2011. 16 One Brave Soul.Living only off Groupons, http//liveoffgroupon. com/about/, accessed February 2011. 17 Stuart Elliott, Super Bowl Marketers Try to Score Points, Too, nytimes. com, January 31, 2011. http//www. nytimes. com/2011/02/01/business/media/01adcol. html? _r=1&scp=3&sq=groupon&st=cse, accessed February 2011. 18 Like new customers? Then youll love Groupon, grouponworks. com, http//www. grouponworks. com/, accessed February 2011. 21 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011. For the exclusive use of B.WANG 511-094 Groupon Laurie Segall, Groupon Spends Big on Controversial (Tasteless? ) Super Bowl Spots, m oney. cnn. com, February 7, 2011, http//money. cnn. com/2011/02/06/technology/groupon_superbowl_ad/index. htm, accessed February 2011. Wailin Wong, Groupon Pulls Controversial Tibet Ad, chicagobreakingbusiness. com, February 11, 2011, http//chicagobreakingbusiness. com/2011/02/groupon-pulls-controversial-tibet-ad. html, accessed February 2011. 21 22 23 20 19 http//amplicate. com/love/groupon, opinion by User-7855g5, posted Jan 27 2011, accessed March 2011. http//www. roupon. com/press, accessed March 2011. Ibid. 24 Beth Teitell, For Coupon Overreachers, a Chance to Recoup, The Boston Globe, March 9, 2011, http//www. boston. com/lifestyle/articles/2011/03/09/market_for_groupon_remors e_allows_users_to_unload _coupons, accessed March 2011. Too Much of a Good Thing? groupon. com, September 16, 2010, http//www. groupon. com/blog/cities/ too-much-of-a-good-thing, accessed February 2011. What do you get with Groupon that you dont get anywhere else? grouponworks. com, http//www. grouponw orks. com/why-groupon, accessed February 2011.William Wei, American Apparel Source Raves about a $3 Million Groupon DealReveals Sales add up that Will Erase Ongoing Doubts about Groupon, BusinessInsider. com, December 14, 2010, http//www. businessinsider. com/american-apparel-groupon-2010-12, accessed March 2011. Groupon in Retrospect, posiecafe. com, September 11, 2010 http//posiescafe. com/wp/? p=316, accessed February 2011. Shira Ovide, Groupon Merchant Theres a crack in their Business, DealJournal, WSJ. com, January 7, 2011, http//blogs. wsj. com/deals/2011/01/07/a-groupon-customer-speaks-why-groupon-didnt-work-for-me, accessed January 2011. 0 What do you get with Groupon that you dont get anywhere else? grouponworks. com, http//www. grouponworks. com/why-groupon, accessed February 2011. 31 Rolfe Winkler, Groupon Has a Chance to Cash This One In, online. wsj. com, January 24, 2011, http//online. wsj. com/article/SB10001424052748703398504576100203631870050. html? KEYWORDS=grou pon, accessed February 2011. 32 Pascal-Emmanuel Gobry, Groupon Buys Up Competitors in Israel, South Africa, and India, businesssinsider. com, January 11, 2011, http//www. businessinsider. com/groupon-snaps-up-more-internationalcompetitors-2011-1, accessed February 2011. 9 28 27 26 25 Michael Hickins, The Groupon Frodo Memo, WSJ Digits, February http//blogs. wsj. com/digits/2011/02/25/the-groupon-frodo-memo/, accessed March 2011. 33 25, 10, 2011, 2011, Bill Saporito, The Groupon Clipper, Time, February http//www. time. com/time/business/article/0,8599,2047215-1,00. html, accessed February 2011. 35 34 Michael Hickins, Groupon receipts Hit $760 Million, CEO Memo Shows, The Wall Street Journal, February 26, 2011, http//online. wsj. com/article/SB10001424052748703408604576164641411042376. html? mod= WSJ_Tech_LEFTTopNews, accessed March 2011. 6 Groupon CEO Apologizes to Japan Customers for Osechi Mess-Up, japantoday. com, January 18, 2011, http//www. japantoday. com/category/national/vie w/groupon-ceo-apologizes-to-japanese-customers-forosechi-mess-up, accessed February 2011. 37 Tim Krisher, Groupon Users Furious about FTD Flower Deal, HuffingtonPost. com, February 13, 2011, http//www. huffingtonpost. com/2011/02/13/groupon-ftd-deal_n_822360. html, accessed March 2011. 22 This document is authorized for use only by Boshen Wang in MACC 402 Groupon taught by William Forster from August 2011 to December 2011.For the exclusive use of B. WANG Groupon 511-094 Groupon CEO Apologizes to Japan Customers for Osechi Mess-Up, japantoday. com, January 18, 2011, http//www. japantoday. com/category/national/view/groupon-ceo-apologizes-to-japanese-customers-forosechi-mess-up, accessed February 2011. Kunur Patel, Groupon Primes Itself to Become the Next Zappos, AdAge Digital, March 1, 2011, http//adage. com/article/digital/groupon-primes-zappos/149141/, accessed March 2011. Christopher Steiner, The Next Web Phenom, forbes. com, September