The Chart That Will Scare Away Many Groupon Investors

by Vinicius Vacanti on October 21, 2011

Today, Groupon filed a prospectus to raise funds via a public offering. Over the next week, they will be pitching investors to participate in this offering.

One question these potential investors should make sure to ask: what happened to Groupon’s quarter over quarter growth rate?

Why is the growth rate collapsing?
There are a few potential reasons why their revenue growth could be stalling.

  • Reduced marketing spend.  While Groupon was able to break even this quarter, they did so by reducing their marketing spend. Unfortunately, marketing spend also fuels growth by acquiring new subscribers. Groupon grew their subscribe base by 23% this quarter. The previous quarter, they grew by 39%.
  • Competition. As competition in the space heats up with Google Offers, Amazon and LivingSocial, Groupon is getting crowded out of the inbox. In Q3, the number of Groupons sold grew just 1% despite Groupon growing their subscribe base 23%.
  • Halted Growth in Deals Offered. In previous quarters, Groupon’s growth benefited from the fact that they were featuring more merchants in each city. In Q2, they featured 38% more merchants than in Q1. However, in Q3, they didn’t feature more merchants than Q2 and thus did not benefit from further personalization.

For a business that’s roughly break-even, Groupon will certainly need to justify a valuation over $10 billion via a growth story. Unfortunately, that growth story needs some convincing.

Vinicius Vacant is co-founder and CEO of Yipit, the leading daily deal aggregator. He also shares his thoughts on the daily deal industry via his twitter account: @vacanti. Yipit also offers a data product which provides offer detail and competitive intelligence to the Daily Deal Industry.

  • http://www.taitran.vn Tai Tran

    The chart that will scare way many Amazon investors http://i.imgur.com/vbDIQ.jpg

    Why haven’t you run away from Amazon?

  • Jack Peterson

    good synopsis. live blogging of Groupon’s ipo presentation is here:
    http://jackp27.blogspot.com/2011/10/notes-on-groupon-ipo-roadshow.html

    thanks kindly,
    JACK

  • John

    I knew someone would analyze this in depth.  Amazingly after all the critiques about exorbitant customer acquisition costs, they fix it in one quarter.  Well, here you have it.

  • http://twitter.com/duodduck duodduck

    Ha! Groupon actually lost money on me. When I signed up, they gave me a $10 credit, which I promptly spent, never to use Groupon again. You can’t just buy customers like that– you’re not necessarily getting power consumers, you’re just getting cheapo coupon clippers who can recognize a free buck when they see it.

  • JGK

    I invest best when I believe in the
    product. However Groupon is not giving me good vibes (man)  I am a
    marketing guy who helps local businesses…many local merchants I
    speak to are finding the sampling model Groupon uses, good for a one
    off promotion /sampling but not so good long term…the problem being that
    the retention of these bargain seeker customers is low and does not
    offset the loss in revenue/profit from the Groupon offer. That (and the
    growing competition) does not bode well long term. In addition I run
    marketing campaigns for local businesses and I “applied” to offer a
    groupon for a local aquarium maintenance company – a real business http://www.fishworks4u.com
    This was 14 weeks ago and nobody has followed up despite 6-7 calls
    from me. I think they may be experiencing some customer service
    blockages as they grow too fast.

  • Audjt 2

    Thanks for confirming my concerns I’ll skip it

  • Nicole

    “…Gosling also indicated that since they have a focus on building long term relationships they are prepared to negotiate with business partners who share the long term vision…” what utter rubbish! Groupon dictate that you make a loss and this is why http://www.meat-me-online.co.za walked away from it.

    Groupon business partners customers must consider the following before signing up:

    - What demographic of consumer are you trying to appeal to? e.g. cheap-skate never to be seen again consumer or a long term customer with repeat business. The former is usually whom you get when discounting products between 50%-90%

    - How much is each deal actually costing you? i.e. You pay your supplier R160 for and item you sell at R200, you sell 1000 deals @ R100 (50% of R200) Groupon gives you R25 per deal and you must foot the R35 as a marketing liabilityexpense. Multiply by 1000 per month x 24 months that’s R35 000 per month for a never to be seen again customer! Careful this is what sinks small businesses!

    - Groupon only pay you for what is redeemed. So if they sell 1000 and only 500 are redeemed you don’t get the expected R25 000 you will only get the R12 500 for those redeemed 3 months after the fact. Yes that’s right Groupon keep the rest and no revenue split! Ethical?

    - They lock you into a 24 month contract. This is always a sign that there is something to be wary of with the business model. Apart from the obvious ask yourself if you really want to be discounting your productservice for 24 months and viewed as a mass discount bizarre? After all we are all in business to make money – not just Groupon.

    Groupon customers beware!

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