I Love to Get My Groupon, but…

Groupon deal

Like most people, I love a good deal.  I tell my mother, my sister, my friends, anyone who will listen about any bargains I find and snag.  So, I signed up for Groupon and I’ve opened nearly every email they’ve sent me.  BUT, I just took a look at the new Groupon IPO filing and I’m not sure it makes sense to add “Groupon” to my Microsoft Word dictionary.

Here’s the problem.  Now that the creative accounting has been adjusted, it’s very clear that the company isn’t making any money and they have much to do to get to profitability.  According the filing, Groupon spent $6.40 to acquire new subscribers in first quarter of 2011.  (That was $208 million in marketing expenses for the incremental 32.5 million customers added in first quarter.)  But, Groupon’s gross profit—the money it gets after paying merchants from gross proceeds—is just $3.25 per subscriber.  (Compare $270 million in gross profit to 83 million total subscribers.)

How will Groupon close the gap?  They have several options:

  • Reduce marketing spend (Highly unlikely.  As Groupon notes in its filing:  “[W]e expect our operating expenses to increase significantly in the foreseeable future.”)
  • Increase the number of subscribers who become actual Groupon purchasers
  • Increase the number of Groupons each customer purchases
  • Increase the average revenue on each Groupon sold
  • Increase the number of relevant deals offered
  • Demand a higher percentage of the merchant deal (though this strategy is fraught with danger, given that the company currently extracts about 50% of revenue on every deal)
  • Focus the marketing spend on prospects that yield the highest conversion (subscriber-to-purchaser) rate
  • Optimize the presentation of deals so that more deals are sought out and “opened”

Here’s the tough part, Groupon purchasers are, by definition, looking for a deal.  They are accustomed to finding good deals and are being conditioned to do seek them out as more online couponers enter the market.  Deal-seekers aren’t usually brand loyalist.  So, when Yelp or OpenTable or Livingsocial or your local direct mail vendor-turned-online couponer presents a deal, the lowest-priced, relevant deal is the winner.  So, competition can and will significantly lower margins in this business.  The question is: Can Groupon get profitable and sustain profitability as more copycats enter the market?  We will soon see.