With 40 million subscribers from over 300 markets from 35 countries, and with 20 million groupons already sold as of date, Groupon is a raging success. Groupon provides a real “Pay for Performance” marketing model for local businesses, helping them get new customers using the power of viral web marketing. Groupon also recently started providing Deal Statistics including aggregate buyer demographics such as gender, age and Zip code, share of purchases bought as gifts, distribution of sales by time etc, to merchants running the deals. Having such data will help the merchants to better understand their customers, and make product offerings and their marketing campaigns more focused to their customers.
But how defensible is Groupon’s market position? The barriers to entry in group buying business are so low, that as per Groupon CEO Andrew Mason, there are 500 Groupon clones in the market. Unlike a true marketplace such as eBay, there are limited network efforts in the Groupon’s business model. The network effects of Groupon is induced by
- 40million subscribers, who attract more merchants to want run deals at Groupon, and hence more deals for the users, attracting even more users.
- More merchants would mean deals available in different products and services, and Groupon can run more personalized deals to cater for subsets of users.
- Because there are more users, the chances of any deal going through are much higher, resulting in more successful deals, which add value to both user and the merchant, attracting even more users and merchants.
- Also more users, and more deals will give more data to mine, and will significantly improve the personalization algorithms, resulting in better personalized deals, which adds value to users.
A pictorial representation of network effects in Groupon Business model:-
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| Network Effects in Groupon Business Model |
However, for users and merchants, there are no barriers to exit. What stops a user from signing up for a deal elsewhere? What stops a merchant from running the deal in another site offering similar access to users? I think the current business model of Groupon at best induces weak network effects, and is completely vulnerable to competitive forces. There is no stickyness in the system, and there are no switching costs for any of the stakeholders. Groupon can increase the stickyness by rapidly growing and having a large user base which will be attractive to the merchants, and vice versa. But even a strong network effect is not a guarantee for success, and in fact network effects alone have never been enough to make users stick to a product/service for long. The best example is Facebook, which dethroned MySpace with a better technology and product. Users look for value, and merchants look for profits; In a free market, customers (users and merchants) will use that service that maximizes their utility. Groupon is no exception to this established principle in market economics.
Further, the network effect in Groupon business model, albeit weak, is induced by symbiotic growth of number of users and number of merchants.While Groupon has no added cost in scaling up its user base, (in fact, it added 3million users in just one week), it is a different story when it comes to adding merchants, and running deals. Groupon has a significant number of sales persons who acquire merchants, and copywriters who write attractive ads for the deals, on behalf of the merchants. In order to scale up the number of merchants, Groupon must also increase its sales force, and copy writers; scaling comes at a cost, and it will likely reduce the slope o the hockey stick in the Groupon’s financial graphs.
It is not that Groupon is not aware of these vulnerabilities. In fact Groupon appears to be taking significant steps to defend the fertile group buying market they created from scratch. Recently, Groupon has announced their plan for introducing "Groupon Stores", which will enable any merchant to run their own deals in Groupon. I have discussed about the possible implications of Groupon Stores, for Groupon, in my next post.
Further, the network effect in Groupon business model, albeit weak, is induced by symbiotic growth of number of users and number of merchants.While Groupon has no added cost in scaling up its user base, (in fact, it added 3million users in just one week), it is a different story when it comes to adding merchants, and running deals. Groupon has a significant number of sales persons who acquire merchants, and copywriters who write attractive ads for the deals, on behalf of the merchants. In order to scale up the number of merchants, Groupon must also increase its sales force, and copy writers; scaling comes at a cost, and it will likely reduce the slope o the hockey stick in the Groupon’s financial graphs.
It is not that Groupon is not aware of these vulnerabilities. In fact Groupon appears to be taking significant steps to defend the fertile group buying market they created from scratch. Recently, Groupon has announced their plan for introducing "Groupon Stores", which will enable any merchant to run their own deals in Groupon. I have discussed about the possible implications of Groupon Stores, for Groupon, in my next post.
