The Boston Effect: Groupon Business Model set to fail?

The Boston Effect: Groupon Business Model set to fail?

If the immediate follow-up analysis to Groupon’s S-1 results released on June 2nd can be summed up in a phrase, it is this: Not Good. The negative press over the last few weeks has been considerable, despite the good numbers. Since then, however, points of view have tempered, with those rooting for the daily deal giant having a positive story to fall back on. And those who think Groupon’s set to fail have Yipit’s Boston study to cite to justify their stance.

Considering that the much-anticipated results were announced on the 2nd and Yipit had its Boston analysis ready on the 3rd of June, shows that the study has been underway for a while. They timed the release accordingly. It’s not like Groupon hasn’t faced doomsday predictions before. There have been stories that local businesses despise parting with half their profits, that users suffer from ‘deal fatigue’, that its business model is inherently set to fail. Importantly, that many local businesses may use ‘discounting’ to get new customers and then opt-out. Much before the bad PR, post the S-1 results, the New York Times covered the Jones Graduate School of Business study which concluded that less than 45% of businesses would repeat a Groupon deal. Groupon insists that close to 90% of businesses return. Whom should you believe? The Jones School study covered “150 businesses in 19 American cities and 13 product categories that ran Groupon promotions between June 2009 and August 2010,” according to NYT. The business quoted in NYT, an upscale dining place, Jeffreys, in Austin profited hugely from its one-time deal with Groupon, but as the article says, “Mr. Weiss (owner of Jeffreys) said that, with the introduction to new customers and with an economy that may be rebounding, he hopes he won’t need to try discounting again.”

If businesses take the business and run, what happens to Groupon? Thankfully, at least for now, it seems like many local companies find that their business model can benefit from repeated Groupon deals.

Back to the Yipit Boston Study which led to all the bad publicity. But Yipit did make up for all the bad news. More details on that later, but first, well, the bad news. Yipit’s study of Boston shows that while the city’s topline growth looks good, the deal company’s business model is deteriorating in its oldest market.

In Boston, Groupon has increased the favorite word that’s clubbed with ‘social’ these days – ‘personal’. Its deals are increasingly personalized and targeted in Boston, and this did add to its quarterly revenue in 2010. Ever since, however, the charts look different. As Yipit’s Boston chart shows, there has been a sharp decline since the 2nd Quarter in 2010, in its quarterly revenue per subscriber.

Blogging about it in Business Insider, David Sinsky of Yipit, says, “Far more worrisome for Groupon is the fact that its existing customers (those 20% of subscribers who have ever bought a Groupon) are also becoming less engaged.”

Yipit’s study also shows that the customer acquisition cost of Groupon is set to rise, as the market matures. And let’s not forget the sheer number of Groupon clones that have emerged.

Groupon’s Business Model is also practically hassle-free to replicate. There’s no barrier for entry and it seems like every yuppie with a stomach for a Web business is trying to pry Groupon’s customers away from it.

Oddly enough, the negative press triggered by Yipit, was to a certain extent contained by it. As just 2 days after the post highlight the boston effect, the Yipit blog had a post headlined, “The Reports of Groupon’s Death Are Greatly Exaggerated”

It seems like the Boston-post, which highlight growing costs of retaining customers and loss of customer interest triggered other Groupon-death analysis that attacked the company, with claims that seem unsubstantiated. Those are the areas that Yipit went about trying to address.

Among them was a fact mentioned in this post as well, that businesses don’t like Groupon deals. This is what Yipit has to say, “44% of daily deals run in May were run by businesses who had already run a daily deal. If they really had a bad experience, why would so many merchants be doing it again?”

The “fix-it” post also addresses the easy business model replication, that there is hardly an entry barrier. “While there’s no barrier to entry in the space, there’s now a barrier to scale and Groupon has scale. Over time that scale will allow them to develop a better experience on the user side and merchant side,” writes Vinicius Vacanti , the co-founder and CEO of Yipit.

So will all this bad press bring Groupon’s valuation down? What’s going to happen to its IPO?


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