Dynamic Pricing Strategy for Groupon An analysis of current business model and recommendations

GROUPON INC.

Dynamic Pricing Strategy for Groupon

An analysis of current business model and recommendations

This case study is an analysis of the current business model of Groupon and recommendation of completely shifting to Dynamic Pricing.

Submitted by:

Group 24 – Section B

K Nagesh Naidu (224)

Sourabh Soni (252)

Manish Kumar (PhD)

Section B_24_MA_Case Study

Table of Contents Introduction ............................................................................................................................................ 3

Company profile ...................................................................................................................................... 3

Key Terms ................................................................................................................................................ 4

Loss Leader .......................................................................................................................................... 4

Coupon ................................................................................................................................................ 4

Business Model of Company ( The Groupon Business Model) ............................................................... 5

The Group Discount Business Model – ............................................................................................... 5

Target Segment ( Merchants) and their benefits ............................................................................... 5

Target Segment (Customers) and their benefits ................................................................................ 6

Data Supporting the Business Model .................................................................................................. 6

Data Questioning the Business Model ................................................................................................ 7

Information on SWOT Analysis ............................................................................................................... 8

Competitor Analysis ................................................................................................................................ 9

Sustainability issues with the Current Business Model .......................................................................... 9

Dynamic Pricing as an Alternative .......................................................................................................... 9

References. : ......................................................................................................................................... 10


Introduction It was in the last quarter of 2010 that Groupon, an online Ecommerce firm, with the deal-of-the-day business model was offered takeover bids by Yahoo and Google. It is known that the offers were made in a span of six weeks. Yahoo was the first to make an offer that amounted close to $3billion, followed by Google that offered nearly $ 6 billion. The start-up that had its origins in another venture of its founder, The Point,1 had become the buzzword of the local media. It had become the fastest company to reach $ 1 billion in sales and the second fastest, behind the popular video site Youtube, to reach $ 1 billion in valuation. 2

The value of Groupon at the end of February 2013 was 2.97 billion, far less than the IPO value.

After a lot of deliberation, the founders rejected both the bids. They believed that Groupon was worth well more than $ 6 billion in valuation. The IPO that soon followed proved them right. The market pegged them at over $16 billion.

3

The market value of Groupon in May 2014 was nearly $ 4.5 billion.

Something was fundamentally flawed with its business model.

4

Company profile

Groupon is an online platform for local commerce, making it easy for people around the world to search and discover great deals in local businesses and merchandise. Groupon operates online for local marketplaces5

• North America, which represents the United States and Canada,

throughout the world that connect merchants to consumers by offering goods and services at a discount.

Groupon acts as a third party marketing agent by selling vouchers ("Groupons")that can be redeemed for products or services with a merchant. Groupon also sells merchandise directly to customers in transactions for which they themselves are the merchant of record. Customers access Groupon’s deal offerings through their mobile platform, websites and email.

Groupon categorizes its operations into three geographies:

• EMEA, which is comprised of Europe, the Middle East and Africa, • and the “Rest of World" , which represents the remaining International Operations

1INSIDE GROUPON: The Truth About The World's Most Controversial Company (Business Insider, Oct 31,2011) 2Behind Groupon's $6 Billion Brushoff (Wall Street Journal, June 5,2012) 3Groupon Dismisses Chief after Dismal Quarter (New York Times - Feb 28 , 2013) 4Groupon, Down 40% In 2014, Finally Does Something For Shareholders (Forbes - May 5, 2013) 5An online marketplace (or online e-commerce marketplace) is a type of e-commerce site where product and inventory information is provided by multiple third parties, whereas transactions are processed by the marketplace operator. ( Wikipedia) A Local marketplace means that the seller merchants are local to the consumers buying the product


Groupon offers deals on goods and services in three primary categories:

• Local Deals ("Local"), Groupon • Goods ("Goods") • and Groupon Getaways ("Travel").

Groupon has been ranked as the number one daily deal website followed by Living Social , Whiskey Militia and Amazon Local. Groupon has over 11000 employees and operates in 48 countries. The Core strength of Groupon is the nearly free advertising and marketing services offered to the merchant customers.

Over the years, Groupon has acquired 34 companies which include similar local websites and tech firms. The business fundamentals of the company have faced intense market scrutiny which caused a wide variation in its valuation. Groupon has been under intense pressure to deliver value for its shareholders. In spite of very high revenues ( $ 2.6 billion) , Groupon has not been able to deliver substantial profits ($ 76 million operating profit ; Operating margin of only 2.9%). The EBITDA stood at $ 286,654 (EBITDA margin of 0.0011 %)6

Key Terms

Loss Leader A business strategy that involves selling a certain product at a price not profitable, in order to attract new customers. The expected outcomes are the following:

1) Introduction of an untried / new product 2) Building a loyal / recurring customer base 3) Selling a complementary or related product at a greater profit 4) Offsetting Marketing / Advertising costs for the merchant

Common examples include the following7

A) Gillette offering its Razor at almost negligible prices. The refill blades drive the actual profits.

B) Microsoft selling its XBOX 360 gaming system for almost a $124 loss. The video games had a much higher profit margin that offsets the XBOX loss.

Coupon A Loss Leader strategy available in the following forms:

A) Offline in the form of Paper Coupons and In Store Register Coupons. B) Online in the form of Voucher codes and/or Bar Codes.

6Source – Groupon Annual Report 2013 7Loss Leader Strategy – Investopedia.com


General Characteristics:

A) They come with an Expiration Date/Time B) Nominal Discounts (Eg: 15% - 30%) C) Applicable to essential goods ( Eg: Groceries ) and also non-essential goods/services ( Eg: A

Spa service)

Business Model of Company ( The Groupon Business Model)

The Group Discount Business Model – The name Groupon could be broken down into two words – Group and Coupon. As the name suggests, it implies offering coupons to an entire group rather than individual customers. Groupon offers one deal a day on its website. The core features of the coupon offered are:

1) Expiration date ( Similar to regular coupons) 2) Large discounts (50% -90%) 3) Payment made by the customer upfront for the entire value of service (after discount). 4) Offer is valid only if large number (nearly 20 customers ) also purchase the same

Typically, Groupon took a 50% commission on the coupon value. For example, if a customer buys a $20 coupon for a pizza worth $40, he/she essentially gets a 50% discount on the product. Groupon would charge $10 leaving the merchant ( in this case, the pizza outlet) with only $10. This translates into a 75% loss for the merchant.

The justification provided by Groupon for such a high discount is that it motivates a first time consumer to try out a new restaurant. In many cases , a Groupon coupon is valid only for first time customers.

Every Groupon deal has two expiration dates. The first expiration date signals availability of the coupon (the Groupon Web site provides a countdown clock). Once the deal is purchased, there is a second deadline by which the coupon must be used or redeemed. 8

Target Segment ( Merchants) and their benefits Groupon acted as an online market place for local merchants. The primary target segment was services providers. This included local businesses looking to save marketing costs. The categories listed by Groupon include9

8How does Groupon work? (Howstuffworks.com) 9Business Types served by Groupon (www.grouponworks.com/case-studies/)

:


• Restaurant • Beauty and Wellness • Travel • Activities • Shopping • Services • Tickets

The benefits to merchant customers were:

1) They were free to feature their business on Groupon’s website. 2) They could receive targeted customer information for free.

The second point was the most attractive value proposition from Groupon. Conducting market surveys in an extremely fragmented consumer market to gauge the customer interest in your product is extremely challenging. Market survey results run the risk of inaccuracy. On the other hand,a customer buying a coupon for a pizza outlet is a direct evidence of him/her liking a pizza. Merchants were also free to use their email IDs to send follow-up offers.

Target Segment (Customers) and their benefits The target consumer segment ( which remains Groupon’s primary customer segment till date) was the young urban professional willing to try out something new in his/her town. It could be a group of friends celebrating a birthday party or tourists new to town looking for group bargaining. The focus was wants and not needs.

The benefits to consumers were :

1) They could try out a new restaurant or a spa at very low prices. 2) Easy availability of dual information on local businesses as well as discount deals

Data Supporting the Business Model Groupon claims that the business model works and 97% of businesses come back to be featured on the website again. 10 In another research by Asst. Prof, Utpal Dholakia , a large no. of merchant customers praised Groupon’s business model saying it had helped them achieve business objectives.11

10Grouponworks.com 11How Customer Self-Determination Influences Relational Marketing Outcomes: Evidence from Longitudinal Field Studies (Dholakia, 2006)


A study revealed that one in five customers never redeems the coupon. Thus, businesses get paid for not providing any product or service.12

Data Questioning the Business Model

Also, Groupon can also be a last resort for businesses that are running the risk of a Bankruptcy. In that case, they will be willing to sell even at a very low price.

Surprisingly, another study by Prof. Dholakia had the following findings:

• The relatively low percentages of deal users spending beyond the deal value (35.9%) and returning for a full-price purchase (19.9%) are symptomatic of a structural weakness in the daily deal business model.

• Less than half of the businesses indicated enthusiasm about running another daily deal in the future.

• Fully 72.8% indicated openness to considering a different daily deal site, • Only 35.9% of restaurants/ bars and 41.5% of salons and spas that had run a daily deal

asserted they would run another such promotion in the future13

12Daily Deal Backlash (business.time.com) 13How Businesses Fare with Daily Deals: A Multi-Site Analysis of Groupon, Livingsocial, Opentable, Travelzoo, and BuyWithMe Promotions (Dholakia, 2011)


Information on SWOT Analysis

Strengths – Groupon is ranked number one in the industry, ahead of its closest competitor Living Social. Over the years, Groupon has made 34 acquisitions of similar businesses and tech firms.

Weaknesses – The loss of the valuation since the IPO gave Groupon a lot of bad press. Also, the questionable accounting practices like the line item ACSOI (adjusted consolidated segment operating income) raised credibility issues.

Opportunities – Promoting mobile application usage ( a general strategy for most Ecommerce firms) such as offering a slightly better deal could boost the subscriber usage. The strategy of Dyamic Pricing would be elaborated further in this case study.

Threats – As described in the previous section, nearly half of the merchant customers have taken losses. The low technological barriers to entry resulted in nearly 400 competitors by 2011.


Competitor Analysis

In 2011, the strongest Groupon competitors were Facebook, Google and Living social.14

Google launched Google Offers in 2011

15 and later shut down in 2014.16Facebook launched Facebook Deals but was unsuccessful and withdrew the service within four months.17

1) Although primary positioning around Services, there is a more diverse products (Retail Goods) portfolio in comparison to Groupon.

At present, the only serious competitor for Groupon is Living Social. Headquartered in Washington D.C. , it has now more than 70 million members worldwide. It was founded by a group of highly successful facebook developers. It later received a $100 million funding from Amazon. The core strategies are:

2) The discounts offered are not as high as those offered by Groupon but remaining mostly above 50%.

3) Groupon’s offerings were grouped only under three categories – Local Deals, Goods and Getaways ( Travel) whereas Living Social’s categories are – Retail, Services, Health and Beauty, Sports and Fitness, Events and Activities and Restaurants. This implies a better categorization of the Consumer and corresponding Merchant segments. 18

Sustainability issues with the Current Business Model

The root problem concerning Groupon is that its business model is that which gives short term contentment to the merchant. Initially, the merchant is happy with the outcome of tie up which is large turn out of customers especially first time customers. This model is good for the merchants which are on risk of bankruptcy but is not profitable. We need to modify this business model such that it suits the merchants which are looking for long term profits as well as short term customers turn out windfall.

Dynamic Pricing as an Alternative

14Facebook, Google, Living Social: Groupon Competitors That Could Take Over (Huffingtonpost.com ; Nov 5, 2011) 15Google Offers Revealed: Here Are The Secret Details About Google's Groupon-Killer (Business Insider, June 25,2011) 16Google Shuts Down Self Serve Offers Product (bluementhals.com ; March 5, 2014) 17Facebook Kills Off Deals, Its Groupon Competitor (mashable.com) 18Source – Living Social Website (https://www.livingsocial.com/categories.)

https://www.livingsocial.com/categories�


We are suggesting dynamic pricing as a measure. In this case, the value of coupons will modify as a function of time. Our suggestion is explained using this example

Lets say a restaurant lists itself on Groupon to sell its service on Valentine’s day ie 14/02/2015. Groupon is to list the deal two weeks prior ie on 31/01/2015 with a 60% discount. Each day after that, it must lower the discount by 2 percentage points. For example, on 01/02/2015, discount must be 58% and so on. So that on the day of service, 14/02/2015, the discount is 30%. This is an efective way of price discrimination that does not alienate the merchant or Groupon or customer. This method of management has been in use since the 1990’s as yield management in Airlines’s prices. Further, we also suggest that Groupon take a fixed amount as its fee in every discount coupon sold. The reason we suggest this is that the variable cost associated with every deal sold is same for groupon regardless of it being a service or a product. It is irrational for Groupon to take a percentage fee in any sale and it may be one of the reasons it is alienating the customers. This model is similar to www.makemytrip.com which charges a convenience fee for every ticket it sells regardless of the value of the ticket.

References. : Attached as :

1) Footnotes in this document 2) A Seperate Document titled references 3) A folder called Reference Articles 4) Groupon Annual Report

Dynamic Pricing Strategy for Groupon An analysis of current business model and recommendations

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