On Grouponzi

This may not apply to this market, but I think it's still insightful:<p>"Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.<p>Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.<p>If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.<p>Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.<p>Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.<p>And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.<p>In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.<p>For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening."<p>-Charlie Munger<p><a href="http://ycombinator.com/munger.html" rel="nofollow">http://ycombinator.com/munger.html</a>

<i>Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google.<p>Facebook is charging fast too. LivingSocial. Etc.<p>They need to get out in front of this. And that’s what they’re trying to do.</i><p>If your explanation for why they are losing money is that they're <i>doing what needs to be done</i> then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't. That part doesn't make them a ponzi scheme but it does make it a bad business to be in.<p>The part that makes it a ponzi scheme is that they are now seeking more investors even though the vast majority of the money from the last few rounds went to earlier investors. That's pretty much the dictionary definition of a ponzi scheme:<p><i>A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors</i> <a href="http://en.wikipedia.org/wiki/Ponzi_scheme" rel="nofollow">http://en.wikipedia.org/wiki/Ponzi_scheme</a><p>There is nothing wrong with taking <i>some</i> money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy.<p><i>edit:</i> As a side-note the actual original Ponzi scheme was supposed to be profitable through arbitrage of buying and selling Postal coupons: <a href="http://en.wikipedia.org/wiki/International_reply_coupon" rel="nofollow">http://en.wikipedia.org/wiki/International_reply_coupon</a>

Some thoughts on this:<p>A. Spending on customer acquisition is building real barriers to entry.<p>I tend to agree with DHH that the barriers to entry will never be high enough in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal competitors, it cannibalizes its own business model – namely, the artificial scarcity and urgency of daily bargains reverts to more and more on-demand variety. We see this already.<p>B. Spending on direct sales is building a valuable collection of local merchants.<p>Others have built directories of local businesses before. The Yellow Pages, Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a profitable business model from their collection?<p>C. Spending on marketing is building enough public goodwill to transcend value propositions altogether.<p>Groupon is a great brand name, so far. Public goodwill is damn fickle, though. I'd like to think that consumers require a real value proposition from their favorite brands, but I'm not sure that they always do.<p>When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.

I don't see Groupon, or any of the clones as a good investment, for a very simple reason: there's no network effect. In the social realm, thats really the key. Social networks like LinkedIn, FaceBook and Twitter increase their value with each additional user. Telephones are also a classic example of the network effect. Groupon does not become more useful to me the more users it has. Possibly, it becomes more useful to merchants but from the merchant's I've discussed this with, other sites simply offer them better terms and, therefore, more profit.<p>Personally, I think sunchild had a great point by addressing that the artificial scarcity is gone. Myself, and my peers, have now reverted to buying these deals on-demand. If I want a massage deal, I head over to YipIt (an aggregator) and do a quick search. I don't waste my time reading their emails.<p>SwellJoe and GentleBen also addressed the same issue: lack of loyalty. My biggest complaint as a person on constant data overload is that Groupon (I use the Android app) now sends me over a dozen deals per day, half of them for suburban restaurants which I would never patronize. Its no better than coupon books or every other "deal" marketing ploy now.

I'm pretty sure there are "Groupon for X" companies in YC. So clearly people see that there is money to be made.<p>I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga for coping other games? Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?<p>The daily deal marketplace may not end up being a winner-take all market. But will having the biggest subscriber list give Groupon an advantage? Once they flip the switch from growth mode to profit mode, who knows what might happen?<p>I assume the hate is mostly just misdirected jealousy because it seems "so obvious anyone could do it." But like Andrew Chen's recent post, it's not easy to build both your consumer side and your merchant side. Anecdotally, I've heard many of the top 10 deal sites have trouble lining up their next day's deal.<p>While the daily deal industry is far from perfect yet, Groupon certainly unlocked a space that a lot of people are jumping into. And I assume that someone will figure out how to do it right for both merchants and consumers in a profitable, sustainable way.

I worry about Groupon but not for the reasons here. Regarding the financials, it could easily ratchet down acquisition and marketing spend and be very profitable. The barriers to entry arguments are very superficial. Sure, just programming a competing service and closing a few merchants is not that hard. But building an 8 figure mailing list is not easy. Finally, some suspected and I'm inclined to agree that the otherwise ridiculous payoff of early investors and employees might be explainable as necessary to turn down the Google offer.<p>My main concern about Groupon is the core proposition may not actually work in the long term. There are all sorts of problems with fatigue, inherently cheapskate customers, high rates of existing customers, worsening economics, etc.

what justifies taking ~300 million off the table (and that's just 1 person) and then going back to ask for more a short time after? sounds like the investors were keen to exit and make their buck ASAP. i don't think that is a good sign in general. andrew mason took a much more reasonable payday.

Does anyone here have any loyalty to one group-based buying service over another? I certainly don't.

In reference to this part:<p>"Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google."<p>Wouldn't a proper business model dictate just about the opposite? When trying to build a profitable customer base, you should focus on keeping customer acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl ads just don't seem like an appropriate way to spend money for them right now.<p>This is nearly identical to what happened in the last dot com crash. Sure, Groupon does have significant revenues, but they haven't proved (to me anyway) that these revenues are sustainable without their massive expenditures.<p>We've heard numerous times that Groupon considers its sales force to be a major asset, partially justifying its valuation and forthcoming IPO. Maybe. However, unless that sales force proves to be a strategic asset to a customer-facing feature, whether it be cheaper or more interesting deals than the competition, I don't see a multi-billion dollar value there.

"You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now"<p>I don't understand this "oh but they're making $4 billion so they must be a great company!" argument. If my business plan is to pay people $2 and have them give me $1 back, I could also make $4 billion (and I'd be loosing $4 billion in the process, but that's just "marketing expenses"…).

I just feel as if the only justification for this new round of founding MG brings to the table, is that a) they will be able to cut back spending (=profit) and b) Google and Facebook are producing similar products, so it must be something good. Personally, I'm convinced by neither arguments and would argue that it isn't just risky, but pretty much doomed to fail (or rather, be a really bad investment for the public).

Google doesn't offer to buy Ponzi schemes for six billion dollars.

The fact that there are so many clones isn't proof that Groupon's business model works, it's just proof that there are no barriers to entry. Compared to Google and Facebook, their mailing list isn't much to brag about either. If they had impressive churn rates, you can bet we'd be hearing all about it by now. The fact that they keep those numbers secret is highly suspect, in my opinion.<p>Also, paying hundreds of millions out to early investors is exactly what they should NOT be doing if they're trying to "get ahead" of their competition. If they had any faith in their own business model, they'd put it into the business and expect even higher returns.