It comes as no surprise that the Internet has not only helped advance traditional business models but also enabled entirely new types of business models. The web is more flexible than real-life society in many ways, changing how we communicate with friends and family, changing how we work, and clearly changing the way we shop for products and services. This flexibility is a catalyst for the creation of a seemingly endless array of new types of businesses or the reinvention of tried-and-true business models of the past.
One example is the highly popular website Groupon, which prompts consumers to buy daily group deals in order to benefit from discounts from national and local businesses. Grouponâ€™s business model is to partner with established merchants looking to clear out seasonal stocks or excessive supply or to work with newer businesses looking to build a customer base. As the merchants sell higher volume, the cost per unit decreases (at least up to some point). This is where the â€œgroupâ€ in Groupon comes in: A deal only goes through when a certain, predetermined number of Groupon subscribers signs up for it; once this number is reached, everyone who signed up for the deal enjoys the lower price. Groupon took the old-fashioned business model of using coupons to attract customers and married it with the network effects and economies of scale capabilities of the Internet to create a new and reasonably successful business model.
In 2016, Groupon had nearly 50 million active customers in 27 countries, operating in more than 500 cities worldwide; Grouponâ€™s annual revenue was about US$6.2 billion. Being an early player in the groupbuying market and rapidly gaining market share, Groupon enjoyed a first-mover advantage and grew very quickly. In 2010, Groupon went public at a valuation of US$13 billion, trading up to nearly US$20 billion on the first day. Soon after, the stock value â€œtanked,â€ and the company has been worth about half (or less) of its IPO value ever since. Today, Grouponâ€™s market value is about US$5.3 billion. So, from an investment standpoint, Groupon has clearly underperformed expectations.
There are a variety of reasons why Groupon has had mixed success. For many small businesses, Groupon has been a fantastic partner, and for others, a disaster. In particular, the buying frenzy that may result from coupon purchases is a tricky matter that should not be underestimated. Consider, for instance, the experience of an Oregon-based coffee shop called Posies CafÃ©, whose owner eventually lost more than US$8,000, thanks to unexpected increases in customer volume and the stress of hiring additional manpower, from a Groupon-enabled tidal wave of customers. Most small businesses are not capable of coping with a sudden flood of hundreds, or even thousands, of new customers. Think of the logistics of juggling overwhelming customer traffic and associated service quality issues. In addition, if a deal offers a 50 percent discount, Groupon takes about a 40 percent share of the dealâ€™s price (the numbers depend on factors such as size of the deal), leaving the merchant with 30 percent of the original price. Many businesses forget (or are not advised) to cap the number of deals, so that they end up having more business than they can handle and may not be able to limit the losses incurred. Thus, businesses that miscalculate the impact of a Groupon campaign usually end up either suffering huge losses or garnering a crushed reputation as service quality goes down the drain.
Aside from miscalculating the capacity of oneâ€™s business to handle a rush of new clients, businesses often overestimate the long-term impact of a deal on the business. Many customers are looking for a one-time deal and never visit the business afterward. (How often would you repeat that helicopter trip if you had to pay full price, or how often do you need Lasik eye surgery?) Thus, businesses are advised to make the most out of the publicity brought about by Grouponâ€™s coupon campaign. Instead of relying solely on the one-time increase of buyers, which does not always generate profits, business owners should use the opportunity to sell additional products to customers. Likewise, service-oriented businesses should consider offering incentives for customers to come back by signing up for additional appointments. E-mail addresses and other personal information should be collected for future promotional needs. If Groupon is perceived more as an advertising strategy that requires careful management, business owners may, after all, achieve the ends of boosting their reputation and generating enhanced revenue.
1. How has information systems enabled new, interesting business models like that of Groupon?
2. What are the key components of Grouponâ€™s current business model?
3. How might Groupon leverage technology to strategically create a competitive advantage?