The Heart of Groupon’s Business Model

The heart of Groupon’s business model for their clients is not direct profitable commerce (it is only profitable upfront for Groupon). As many understand Groupon is not an ecommerce business. The business proposition that Groupon offers its clients is lead generation.

A very, very small percentage of Groupon clients make money when they generate all those sales. The business model here is aggressive acquisition through an engine that generates a huge amount of “hot” leads with credit cards ready. The challenge is to convert a workable percentage of those ‘loss leader” buyers into profitable customers and have a metric that covers the upfront investment.

There is a reason that the majority of their customers are small, local businesses. They do not have the upfront capital necessary to use more traditional acquisition models, and more importantly they are less sophisticated in the modeling abilities used to determine life-time value of a customer…. especially a customer acquired through aggressive discounting. So for now the growth is miraculous since so many are jumping on the bandwagon with Groupon recommended discounts that cannot possibly end up profitable for those making the offers.

If Groupon’s strategy is to grab the real estate now, and worry about how to evolve the model so that the businesses making the offers can truly benefit, then let’s wait and see how that is accomplished before final judgement is passed.

I am not saying that Groupon will not survive, and they certainly have a business model, although their sales for the year seem to be grossly overstated in many circles. I simply believe passing up what was offered by Google showed tremendous hubris and that I believe they will come to regret the decision… even if they never voice that regret or remain successful.

Ted Rubin