Groupon Doomed by Too Much of a Good Thing

The company asserts that it will be profitable once it reaches scale but there is little reason to believe this. The financial results of Groupons traditional business continue to deteriorate, especially in mature markets, and new ventures such as Groupon Now also have failed to drive profits. And unlike the very few successful companies that scaled before they were profitable think Facebook or Amazon, Groupons business model does not benefit from significant network effects. The companys product is not more valuable to users as more people adopt the platform. If anything, the fact that Groupon is witnessing decreasing revenue per merchant and fewer Groupon purchases per subscriber in its maturing markets suggests that growth may actually decrease Groupons value to its customers. Yet, Groupon maintains a blind faith that growth will be its salvation. As Pets.com learned in the last bubble, such a strategy works just fine until you run out of other peoples money to spend on growth.

The real cause of Groupons problem is that it had too much of a good thing. With over $1 billion of venture capital money to invest in growth, what manager has time to worry about profitability? Groupons “bad money” — investments that were patient for profit but impatient for growth — did not instill the discipline needed to enable the company to emerge as a successful standalone venture. Now, the venture capital markets cannot supply more capital and the company must depend on the IPO market to finance its money-losing operations. Eventually, investors will be unable to sell their shares to a greater fool and Groupon will be added to the list of companies that had immense potential but died because they did not find a successful profit formula in time.

via Groupon Doomed by Too Much of a Good Thing – Rob Wheeler – Harvard Business Review.

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