Web guys like me have been evaluating internet traffic for years. I'm on the wrong side of 30 by some investors criteria, but on the right side of that number to recall what happened in the early days of web advertising and the issues that could potentially even bring down Facebook. Not surprisingly, traffic is at the root of the issue for Groupon just as it ultimately was for companies like All Advantage or the slew of free lotto sites. Foot traffic AND web traffic.
Were I bear, I would focus on how daily deal sites like Groupon can get someone to come once, but how they do nothing (today) to help a business get a repeat customer. This argument is a difficult one. What is Groupon's responsibility? Is it Google's responsibility to get you repeat customers after sending you paid clicks? Google continues to add tools that make you want to spend more, but they have yet to offer tools that makes them accountable for your lifetime value.
The challenge with merchants is that the vast majority of merchants have not thought about their business in terms of lifetime value. We see this with lead buyers who when asked what they would pay for a lead say one number, but when you show them what they are paying, it's multiples higher. If Groupon or Google in the early days focused only on those that understood the metrics, they would have fewer customers. Imagine if Google didn't let people spend money unless they met some fiscal accountability criteria? Where Groupon should learn from Google - put restrictions in place so that merchants can limit their downside. And, don't incent sales people in a way that allows them to make bad deals. Delay payments based on some longer-term success metric.
Were I to be a bear, it would be on their web strategy. Acquiring users is one of their biggest costs, and unfortunately for Groupon and all the deal sites, this is a cost that keeps rising, but that is not why I am actually bearish.
The company has been buying sub-optimal users. It's a calculated gamble on their part. Technically they can purchase a lower quality name to help build up volume in a given market (especially newer ones and harder to target ones internationally). These names may turn a profit, but this purchasing higher volume lower intent users has in my opinion contributed to the quality of customer they send to a restaurant. Do we know for sure that buying an incentived user turns into a lower quality customer for a business? No, but it wouldn't surprise me to learn that a correlation exists. LivingSocial has much higher quality standards for their web buys and won't engage in the same acquisition strategies. They also tend to receive higher qualitative feedback from merchants. Is that enough? No, but it is interesting.
Too Big to Fail or Too Big to Succeed
There is something about Groupon that has me thinking Webvan. The two are so different, but yet they feel so similar. So much hype and so much promise. Yet, one major market correction, and poof, there went 2000 jobs.
Reading over past stories of the final days of Webvan, we see that Groupon is nowhere near where Webvan was, but at the same time, seeing that such a high flying and large a company as Webvan could not only fail but fail relatively fast, must give us pause. A domino effect could sneak up on a company like Groupon - merchants pulling back, consumers buying less, and the capital markets drying up. A few staff reductions and the company continuing to chase profits that aren’t quite enough to cover overall costs, and almost before we know it, they decide to simply close up shop because no one else has the money or desire to keep it going. Hard to imagine such a scenario, but we would have said the same about Webvan.
Not that there was a question, but the answer if there was one might be hubris. When things are good and momentum is strong, a company can seemingly do no wrong. But, very few companies get so lucky as to never face challenges, and it is times like those when you want to see a greater level of awareness and a business maturity. The last thing you want to see is defiance and fueling the fire of a cocksure attitude. A teenager must become an adult, sometimes faster than they might like, but they must. A company is not a rock star or other diva personality who can simply do what they want and have the world adapt to them. Hopefully, we’ll see the rebellious outbursts lessen in our teenage superstar, Groupon. Otherwise, this business prodigy could end up burning out and become an unfortunate and expensive case study.
Groupon has some real assets - a local customer list, great local merchant data, and a large consumer list. It has value, but it's not a technology company, and it shouldn't be valued like one. I'm not ready to go full on bear, but I'm waiting to see if this child star can pull a Drew Barrymore of business.