2 min read

Groupon’s Worst Nightmare

Groupon is wildly successful, a market leader, generating incredible growth, revenue, attention, and market valuations. However, Groupon’s founders and executives shouldn’t be sleeping well at night. Look no further than the Flip: in two years, they became massively succesful and dominated their category. Two years later, flip was scrapped because the whole category was dead.

Groupon went live in 2009, and in about a year, created and dominated the daily deal market, garnering all the attention afforded a beauty pageant winner and sky high valuations. But with success, comes copycats, and while imitation is flaterring, its not profitable. Success in the category will depend on giving the best deal to companies. That means balancing what you charge (your cut of the deal, or 50% of the sale price at Groupon) with how many people you can get to buy.

Groupon has three big assets: it’s email list (~roughly 60 million subscribers), it’s sales force recruiting businesses (unknown, but likely far and away the largest in the space), and it’s brand (“groupon” is to daily deals what “google” is to search). But the storm cloud is on the horizon. Sites like livingsocial, facebook, google, are players on the national level, and a bevy of competitors are entering the market with a niche focus or with a mobile/location based twist. That doesn’t even include sites like yipit, which aggregates all of those other sites into one place to simplify your search or simply send you less emails.

All that competition means that daily deals are being commoditized — as a business owner, if I can go to a competitor who will give me a larger cut, or an audience more likely to buy, or both, I will. As a consumer, it’s worth checking the other sites (or an aggregator) to see what other deals might be out there. Because of commoditization, it’s likely that Groupon’s revenue growth potential is maxed out or peaking.

Bottom line

Daily deals are probably here to stay, and groupon is too, but it’s value is probably peaking right now. It will always be a big brand in the space, but as that space gets more and more competitive, margins will shrink and good deals will be listed by competitors. Also, as businesses use daily deals more and more, they will probably use them in more targeted, focused, and less costly (aka less profitable for groupon) ways: offering deals on tacos the day before the meat goes bad, tax prep in January and February before the season hits up, lunch deals before 11:30 and after 1, discounts for people with no tattoos only). If I were them I would sell/IPO now. They can always keep some stock or options to capture the upside, but the downside is so great.

Editor's note 05/17/2021

Daily deals are only here to stay in the sense they haven't been killed off completely, but Groupon's value really was peaking then - partial credit on the prediciton