Even A Profit Cannot Erase Questions About Groupon’s Business Model

Daily deals site Groupon can’t even produce its first quarterly profit without disappointing shareholders. Though the company’s revenue gained 45 percent year-over-year to come in at $568.3 million in Q2, that was short of analysts’ expectations of $578 million. And while profits were $46.5 million versus a $101 million loss in Q2 2011, investors quickly perceived that Groupon’s main business of selling coupons to merchants’ products and services were in a downward spiral. And that was enough to send Groupon’s share price down nearly 20 percent in after-hours trading.

For a long time, high end establishments, primarily restaurants, have tended to avoid Groupon for fear of being perceived as needing to reel customers in with “discounts.” Apart from the perception, businesses worry that Groupon ultimately undercuts the value of the promotion with deep discounts.

As that aversion continues and the coupon business decelerates, Groupon will likely have to turn to more to advertising. In a sense, Groupon has always been more than just an e-commerce play; by taking fees on transactions, it’s positioned itself as something of an online ad vehicle, driving consumers to original marketers.

Given the distinct marketing data Groupon possesses on members — the Groupon Rewards program boasts 6,000 merchants and 1.5 million members; whether they’ve ever actually bought something through the site or just like browsing the online offers — would also make it valuable to demand side players looking to analyze patterns of purchase intent. But at just the moment Groupon could be exploiting those possibilities, Groupon CEO Andrew Mason all but conceded that its salesforce is also being reduced.

One area potential data partners might want to look at is Groupon’s “deals personalization tool,” Smartdeals. “One of the key inputs to improving our personalization is increasing the selection of deals from which SmartDeals may choose,” Mason said during the late Tuesday afternoon earnings call. “We have done this through deal bank, which stores inventory from every deal we feature for several months to display different deals to users over time. Deal bank has allowed us to increase the number of active deals in North America by more than 10x from about 600, six months ago to over 8,000 today.” (See the Seeking Alpha transcript for the full account of the Q2 earnings call.)

Perception of Groupon first began to slide when it aired a Super Bowl ad last year that attempted to lampoon self-conscious cause-related ads that ended up making the company look insensitive and tone-deaf. But perceptions aside, Groupon is making money. And it probably will never achieve the heights initially expected of it when Groupon first captured attention nearly four years ago. But it does have a ton of customers and merchants and a lot of data associated with both. Over time, that could keep the deals following, at least for the near future.

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1 Comment

  1. I’ve always steered my clients away from using Groupon. Heavy discounting will never grow your customer base. Most of the people who use Groupon regularly are least likely to become regular customers. There will always be exceptions to this rule but I cannot see any value in it.