When Innovation Fails

Do you know Groupon? If you don't, they were the "fastest growing tech company ever." How can they have failed? They're pretty big, did they fail?

All of this is public data. Groupon was seemingly unstoppable from its inception, with a spectacular growth rate that didn't seem to slow down. On February, it more than slowed down, it decreased almost out of the blue. What happened?

They planned to do their initial public offering earlier this year and their value was, at one point, estimated at US$30 billion. They delayed their IPO twice in 2011, once when their growth was halted and another when they had to re-file using standard accounting. Using GAAP converted their huge profits into losses. They also revised an "error" of accounting for revenue where they estimated it twice as high as it actually is.

2 weeks ago, Groupon did its IPO at $20 a share for a market cap of $13 billion. Today, they closed at $24 a share for a $15 billion market cap. I won't be a naysayer or say something seems fishy in the way they've handled themselves. Instead, I'll talk about why. Why are they worth half as much as their estimated value a few months ago?

They're losing money. Over half a billion in losses and their costs seem to be accelerating. Economies of scale are supposed to bring a benefit but that doesn't seem to be the case. They're focused on consumers; people love deals and social networks and Groupon offers a chance to do those two things together. This seems to be similar to a company we all love (Amazon) that started out being unprofitable and focused on consumers but, there's a fundamental difference. Amazon delivered on its promises to its clients while Groupon is failing to do that.

Who's the client? Groupon's clients are businesses while Amazon's clients are the end consumer. Many of Groupon's clients haven't had the repeat business that was promised to them and even made losses when Groupon took 50% of their revenue. How could Groupon fail its clients? It attracts price-sensitive opportunistic consumers but their clients need repeat business to grow. Add the effect of copycats entering the market, not evolving their model enough, and not improving their operations. It all makes sense now.

How can Groupon correct this?

1. They must ensure their clients get enough value from what they pay Groupon. When that happens, their salesforce can shrink without affecting revenues because they'll get repeat clients.
2. Alter their pricing model. All businesses are not made equal; a business with excess capacity and mostly fixed costs (a hotel, spa, and others) is not the same as a coffee shop. One of them will get incremental profits even after paying 50% of the revenue that Groupon brings in.
3. Innov8 on and on and on. Copycats are less likely to ever catch up or take market share.
4. Improve operations. Figure out why your costs are growing faster than your revenues. That's unsustainable, scary, and won't make investors happy.

In short, my suggestion is to them is: Innov8 on (improve their value proposal in any way possible), to delight their client, and to figure out how to operate cheaper.