Four Lessons From Groupon

Last week, Groupon CEO Andrew Mason narrowly kept his job, thanks in part to an equity structure that gives his shares ten times the voting power as other board members.  Groupon stock has lost over 80% of its value since the company’s post-IPO high just over a year ago, and the business has been rocked by accounting issues, increased competition, and fatigue from both consumers and business partners.  Looking back on the past year, what can firms learn from the lessons of Groupon?

1. Rockets Don’t Glide

Only a short time ago, Groupon was growing at over 1,400% per year, supporting for some the company’s early $13 billion valuation.  But achieving such astronomical growth rates required massive investments in marketing to keep a steady stream of new consumers coming in, and a massive sales force to convince small businesses to sign up. Not only do those cost money, but they have diminishing returns: your first acquisitions are the easy ones, but after a point your growth curve levels out and it gets harder and harder to grow the business. At the same time, all that growth makes it hard to build a solid culture, sound processes, and clear controls. Evenutally, the hype machine dies down and you’re left having to back fill the fundamentals.

2.  Transparency Pays

Groupon has been repeatedly dinged for using dodgy accounting standards.  In their IPO filings, they tried to hide  marketing expenses that were needed to fuel customer acquisition, magically turning a loss into a profit.  And more recently, they showed a major revenue surge that was really based on using different accounting techniques for their goods business than their deals business.  The truth is that even if playing fast and loose with the math helps in the short term, it always comes around to bite you in the long term.  By hyping these numbers, Groupon isn’t just hurting its reputation, it’s also preventing the company from taking a sober look at the business.  Transparency early on pays, and attempting to play fast and loose hurts your credibility for the long term – something that’s harder to rebuild than a bottom line, but just as important.

3.  Know What Business You’re In

Early impressions of Groupon portrayed the company as a new kind of Web 2.0 social media startup, like LinkedIn or Facebook, that was showing strong success in local advertising, a lucrative market that even Google hadn’t figured out.  But when the dust settled and growth began to slow, investors suddenly realized that Groupon didn’t have a unique technological advantage, it was a global coupon company with an e-mail list.  And like pre-digital coupon companies, it needed major investments in sales and marketing to make the business work. However, unlike Google, which had a unique technological advantage through its Adsense platform that gave it a head start on competitors, Groupon’s simple technology meant it was easy for others to come in and replicate the product.  When entering a new market, it’s important to know what business you’re really in – and make sure that you have an edge in that space.

4. Deliver value to all of your stakeholders, but especially your customers

A Groupon is an amazing deal for consumers – they get products and services at a deep discount, usually over half off. And it’s also a great deal for Groupon, which usually takes half the revenue from purchases.  The problem?  It’s usually a terrible deal for the advertisers, and those are Groupon’s real customers.  Not only is there anecdotal evidence that Groupon is bad for business, but researchers have actually looked into it and found that in nearly every case, Groupon is a money losing proposition for the businesses that advertise.  That’s a big problem for the company as they go forward, as the easy deals have already been signed, and new businesses are going to be reticent to tap into Groupon’s offer in the future.

How many times have you made a business decision where one stakeholder benefited at the expense of another?  Think about cost reductions that hurt customer service, and ultimately revenue, or made major business changes at the expense of employee morale. Of course, running business is all about trade-offs, but when the customer is on the losing end of those trade offs, in the long term it’s the business that will feel the hurt.

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