TECHNOLOGY

What Groupon Has Going For It

11/04/2011 06:16 pm ET | Updated Jan 04, 2012

Daily deals sites have become the business equivalent of bad pickup lines: easily replicable and overly abundant, with dubiously effective results.

Though Groupon, the king of the daily deal business, saw its value skyrocket to nearly $19 billion following its initial public offering Friday, the company continues to be dogged by doubts over the sustainability of its business model and its vulnerability to scores of hungry competitors.

Analysts can rattle off a slew of challenges facing the company -- the low barriers to entry, the millions it spends on marketing, the threat of deal fatigue and the dissatisfaction of many merchants who've offered Groupon promotions -- but they have trouble pinpointing the company's advantages and see little to set it apart.

"There is some very compelling evidence to indicate that there isn't anything that special about Groupon," said Sucharita Mulpuru, an analyst with research firm Forrester. "What they have working against them is a heck of a lot more than what they have working for them."

Since its launch in 2008, Groupon has spawned hundreds of clones ranging from Gaypon, the "gay Groupon," to Google Offers and Amazon.com's AmazonLocal.

Groupon, often mentioned as evidence of a growing tech bubble, hasn't been able to shake the stigma that nothing, except its size, makes it special. What Groupon currently has going for it, analysts say, is its robust subscriber base -- more than three times the size of its next biggest competitors' -- and the enormous sales force (the biggest in the business) that it has mobilized to recruit local retailers.

Groupon declined to comment, citing the recommended quiet period following its IPO.

Little besides snappy copy distinguishes Groupon's core product -- emailed electronic coupons-- from its rivals. The deals from LivingSocial, Groupon, Google and others that arrive daily all offer discounts at local salons, restaurants and stores, the virtual coupons each adorned with indistinguishable clip-art, countdown clocks and paragraph-long descriptions.

But Groupon's growth has been nothing short of spectacular. The company has over 140 million subscribers, while LivingSocial, the next largest daily deals player, claimed 46 million users in October. Groupon also boasts 53 percent of the daily deal market in North America, leaving LivingSocial with less than half of that at 20 percent, and a herd of other services sharing the remaining 27 percent, according to Yipit, a daily deals aggregator. With the lion's share of the market and highest penetration so far, Groupon can promise to get local merchants into more inboxes than any other daily deals service, a key selling point for the company.

"Groupon's reach is greater than anybody else's: the size of its member base, its brand and its ability to scale," said Greg Sterling, a principal at Sterling Market Intelligence, a consulting company. "Those are things that can be overcome in time by competitors, but for the time being, it's Groupon’s position to lose."

Yet experts counter that rivals can easily grow their own treasure chest of email addresses, so long as they have a robust marketing budget and are able to offer desirable discounts. The daily deals service with the best deals will win in the long term -- by attracting more users and more dollars -- not the site with the most subscribers to begin with.

Analysts argue that the real challenge is turning subscribers into buyers. They note that Groupon's userbase has limited value given that only a small percentage have ever purchased one of the company's offers. Forrester's Mulpuru estimates that between 20 million and 30 million Groupon subscribers out of the over-140 million have paid for a deal.

"A lot of other people can replicate Groupon's email list if they have a lot of money. The real value is taking that list and turning the people on it into buyers," Sterling said. "I don't think that their email list is a moat that can't be assaulted. It's just a bunch of people on a list until they become buyers."

With a global sales force of almost 5,000 people, Groupon stands to benefit from the robust infrastructure it has in place to recruit merchants. This might only be a temporary advantage, as Yipit co-founder Jim Moran notes Google is growing its own army of salesman to target local merchants. If Groupon can move quickly, however, it could maintain its lead.

"Groupon has more sales people than anybody else in the space combined," said Moran. "In the near term this is an advantage because no other competitor's anywhere near that scale."

Some reports suggest Groupon has been doing more to alienate merchants than to endear them to the company. A 2010 Rice University study found just 40 percent of business owners who had offered a daily deal said they would do so again, and 32 percent reported losing money on their Groupon offers. (Research from Yipit, however, suggested merchants were largely satisfied with their daily deals experience). One irate store owner told TechCrunch that offering a discount through Groupon was "the single worst decision I have ever made as a business owner thus far," adding that she lost around $10,000 on the promotion and saw her ratings on Yelp drop.

"The fundamental challenge that I see with Groupon is that their revenue stream, which comes from local merchants and, in some cases, national merchants giving products away, is a train wreck," said Sucharita. "The fundamental disconnect is that what's good for Groupon is not good for the merchant."

Groupon also needs to prove it is good for its users, many of who may experience deal fatigue after a few too many irrelevant emails about teeth whitening or Botox treatments.

Though Groupon has introduced new features designed to better customize the promotions it pushes, analysts say subscribers are receiving a glut of undesirable deals. The company still relies on big blockbusters with mass appeal for much of its profits, according to Yipit, which estimates that ten percent of all Groupons account for 50 percent of revenues.

Whether Groupon can evolve beyond email will help determine its success. Companies like Foursquare, a social network, and Google are leveraging smartphone technology to target users while they’re on the go. But Groupon's flirtations with more tech-savvy products, like Groupon Now, a smartphone application that alerts people to deals based on their locations, have essentially been flops. Five months after its launch, however, Groupon Now represented less than 1 percent of the company's sales in North America, Yipit found.

"If they want to mount sustainable barriers to entry in the long run they need more and more customer engagement with the app and that, so far, has been a challenge," said Moran. "Groupon is not yet a technology company and for them to create long-term, sustainable barriers to entry, they will need to become a tech company."

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