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		<title>What Does Groupon and The Matrix Have in Common?</title>
		<description>Discuss What Does Groupon and The Matrix Have in Common?</description>
		<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999</link>
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			<title>ReggieMiddleton says:</title>
			<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9592</link>
			<description><![CDATA[Fro an article in Fortune magazine that cites university research which strongly corroborates the findings in our report and analysis: http://tech.fortune.cnn.com/2011/06/16/study-offers-grim-news-on-daily-deals/ People may love online deals. But a Rice University study finds that bargain-hunters rarely turn into regulars. FORTUNE -- The growing backlash against daily-deals services got some fresh support this week from an academic study finding that fewer than half of the companies that use such services once are unlikely to do so a second time. The study, by Utpal Dholakia, professor of management at Rice University, also found that nearly 80% of coupon users are first-timers, and only 20% of them become repeat customers of businesses offering deals through services like Groupon, LivingSocial and OpenTable (OPEN). Other companies like Google (GOOG) are actively eyeing the space. The whole idea behind these services is that they act as loss leaders, getting customers through the door to take advantage of a bargain. Theoretically, many customers will either spend beyond the deal offer or return for more business. But Dholakia found that just 36% of customers buy goods or services beyond what was offered in the deal. Worse, less than 20% return to the business for full-price purchases. The findings generally align with the data Groupon released earlier this month when it filed to go public. As competitors pile into the market – some of them huge, like Facebook and Amazon (AMZN) – the business will only get tougher, especially if perception grows among small companies that daily deals don't generate much new business. "Over the next few years," Dholakia wrote, "it is likely that daily deal sites will have to settle for lower shares of revenues from businesses compared to their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals."]]></description>
			<dc:creator>ReggieMiddleton</dc:creator>
			<pubDate>Sun, 19 Jun 2011 08:10:09 +0000</pubDate>
			<guid>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9592</guid>
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			<title>ReggieMiddleton says:</title>
			<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9591</link>
			<description><![CDATA[The Flawed Value Proposition of Groupon’s Primary Customer, the Small and Medium Sized Business First and foremost, we need to realize that Groupon is a marketing and advertising engine for small and medium sized businesses. With that in mind, it would be inaccurate to view Groupon as a direct revenue generator for said business, but rather a method of building said revenues, akin to Google’s AdSense. It’s all advertising. Unlike Google’s AdSense, the Groupon model calls for the SME (small to medium sized enterprise) to give a 50% discount, and then they split (50/50) whatever was charged by the merchant. This amounts to an effective 75% discount to the merchant’s products and services. Low margin, or labor/resource intensive products and services can (and apparently do) get slaughtered in such an arrangement. Let’s walk through a Groupon deal with a local massage parlor (a popular item on NYC Groupon). The parlor promotes a $100 massage that sells for $50. Let’s assume that this massage parlor sports healthy margins of 50%. In the Groupon arrangement, the spa only gets $25 (and so does Groupon), leaving the spa with a 25% net loss on the sale. The measurement of the value proposition for Groupon lies in whether said spa would have been better off dumping 75% of the revenues from a typical sale into a more direct ad campaign such as Google’s AdSense, or better yet a more sophisticated and sticky campaign such as display advertising whose visuals would serve an ad parlors business that much better. Now comes the problems that reality delivers: Economies of scale for small businesses – Groupon’s bread and butter customer. In order for Groupon to continue scaling at its historical growth rate it has to convince businesses to sell A LOT of Groupons. Often times it is difficult, if not impossible, for said businesses to handle the amount of coupons Groupon needs to be sold. Using the spa example, a commenter on a tech site article cited a small spa in NY that recently sold over 4,000 massages - that expire in a year – the equivalent of 12 massages a day for a year. With such an arrangement, the spa would have to either dishonour many of the coupons or Groupon would have to significantly lower its commissions split. Of course, Groupon could have marketed this based on a very low redemption rate of 10% or so, as well. If the low redemption rate is the sales mantra, then we still have the material loss on the sale as an advertising fee and the risk that more coupons will be redeemed than previously anticipated. So, is this superior to direct advertising on a risk adjusted basis? Restaurant.com had a very similar business model, and over time it failed to scale as anticipated and instead settled as niche ad/marketing tool. As more competitors enter the space (and they certainly are, as shown below) - these deals look even less appetizing both to the core Groupon customer (small businesses) and the product delivered to said customers (the coupon buyer). Local merchants offering low margin/labor intensive products and services will suffer diminishing returns and even less of an appetite for what is basically the social media spin on the "loss leader" approach to customer acquisition. The primary reason this is particularly so with Groupon is… The type of customers Groupon attracts are perpetual deal seekers (cheapskates, so to say) that probably value discounts over quality. Even if that is not the case, the mere fact that someone uses Groupon regularly means they have become conditioned to expect deals that retailers cannot actually afford to give (at 25% revenue intake). Net-net: New customers that the retailer can actually profit from will most likely not appear. Bargain seekers with little to no brand or vendor loyalty or lock-in will jump from opportunity to opportunity, as long as there are enough competitors available, speaking of which…]]></description>
			<dc:creator>ReggieMiddleton</dc:creator>
			<pubDate>Sun, 19 Jun 2011 08:00:57 +0000</pubDate>
			<guid>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9591</guid>
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			<title>ReggieMiddleton says:</title>
			<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9590</link>
			<description><![CDATA[The flawed business model There are plenty of questions about sustainability of the business model. Groupon’s business model has relatively low barriers to entry, which makes marketing even more crucial. In its IPO filing, Groupon says it expects to “increasingly compete against other large internet and technology-based businesses, such as Facebook, Google and Microsoft, each of which has launched initiatives which are directly competitive to our business.” The group’s business model implicitly assumes that the company can absorb customer acquisition costs of an acquired customer as he generates subsequent business which would expand margins at later stages. However, the model fails to understand the “stickiness factor” (or lack thereof) of the customer. Unlike Facebook and LinkedIn which compels users to stick to the portal due to social pressure, there are no such strings attached to Groupon. The customers are free to switch to alternative websites if they find a better deal which would make high marketing expenses (read: losses) a structural more than a cyclical issue. The company had stated in its IP filings that its operating expenses are expected to increase substantially in the foreseeable future as it continues to invest to increase its subscriber base and expand its marketing channels, and business operations. Given the new entrances such as Google, Facebook and Microsoft and lower engagement of existing customers (as evidenced by decline in Groupon’s sold per subscriber and decline in revenue per Groupon sold), it’s hard to present a case where company’s margins would expand.]]></description>
			<dc:creator>ReggieMiddleton</dc:creator>
			<pubDate>Sun, 19 Jun 2011 07:59:13 +0000</pubDate>
			<guid>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9590</guid>
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			<title>ReggieMiddleton says:</title>
			<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9589</link>
			<description><![CDATA[The point above cannot be emphasized too greatly, for there is even a twitter account that's dedicated towards a grassroots movement of businesses against groupon with over a thousand followers: http://twitter.com/#!/SayNoToGroupon Why is this? Well, the danger of SME discontent can be found in the numbers. As excerpted from our report: The company generated $1.3bn of revenues for trailing 12 months with gross profit of $530m (gross margin of 40%). The company’s gross margin has been fairly stable at these levels (As noted earlier - Groupon’s gross profit is the actual measure of sales). Groupon has lost a huge sum of money despite all that growth. And furthermore, there are still no signs of profits anytime soon. The company reported operating loss in each of the last three years with an operating loss of $420m and $117m in 2010 and 1Q-11, respectively. Marketing expenses as proportion of gross profit was 94% in 1Q-11 while SG&A as proportion of gross profit was at 84%. In 2010, Groupon reported net loss attributable to common stockholders of $456m (-$146m in 1Q-11). You see, Groupon cannot afford unhappy businesses, yet most businesses have no choice but to be unhappy if they are labor intensive or low margin and use Groupon.]]></description>
			<dc:creator>ReggieMiddleton</dc:creator>
			<pubDate>Sun, 19 Jun 2011 07:57:15 +0000</pubDate>
			<guid>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9589</guid>
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			<title>ReggieMiddleton says:</title>
			<link>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9588</link>
			<description><![CDATA[The following information is excerpted from the subscriber document - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36) found at http://boombustblog.com/component/option,com_docman/Itemid,200023/gid,388/task,doc_download/ Click the "subscribe menu at the top of the page to access the report... Groupon’s subscribers have increased from 0.15m in 2Q-09 to 83m in 1Q-11 while the total Groupon’s sold have increased from 0.1m to 28.1m in the comparable period. Although the growth rates are still strong, they have declined substantially in the last two years (see chart below). In addition, Groupons sold per subscriber have also declined (see charts below). The decline in Groupon sold per subscriber is a clear indication of the fact that its existing customers are also becoming less engaged and higher marketing (customer acquisition) expenses should be expected to be the norm rather than exception at Groupon (for details refer to “Sustainability of business model”). http://boombustblog.com/images/stories/Groupon/image003.png]]></description>
			<dc:creator>ReggieMiddleton</dc:creator>
			<pubDate>Sun, 19 Jun 2011 07:37:01 +0000</pubDate>
			<guid>http://boombustblog.com/reggie-in-the-news/item/5742-groupon-the-matrix-1-1999#comment-9588</guid>
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