Does Groupon Bring Value?
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value Added - it used to be a social media catchphrase. Now it is an imperative business strategy.
A business cannot just offer a service; it has to offer a value-added service. No one pays a lawn service to mow the lawn just the way they would have done it themselves. They pay a lawn service to do a job they cannot do themselves, or to do it better than they would have done it on their own. It is a simple concept, but one that got lost somewhere in the dot com boom, and lost again in the age of social media.
During the dot com boom people got caught up in the excitement of the new ability to “do something,” forgetting to ask whether or not the “something” was needed, necessary, or brought any value to the marketplace. Eventually the bubble burst and good companies exploded with the bad.
We're seeing a sudden resurgence of companies that provide a service without necessarily adding additional value to the marketplace. Groupon (NASDAQ: GRPN) is high up on the list of companies that offers an enjoyable service, but doesn't necessarily offer more value.
Groupon, when boiled down to the bare bones, sells another company's discounted product or service to the public without adding any new value--it simply resells. Like Facebook (NASDAQ: FB), Groupon is faced with the two great business conundrums: serve the buying public, or the merchants whose services are sold? Keeping the public happy (giving them what they want at a price they can afford) does not always equate to helping merchants meet their goals (make money).
Since its November 2011 IPO, Groupon has lost over 81% of its value, as the reality failed to live up to the hype (not unlike Facebook). When looking at a company, investors must consider more than what the company is worth on paper and in assets, but also what the company offers the market. What value does it add? Can the market survive without this company? Or would its demise leave a notable hole?
The Business Model
The Groupon business model is its weakest link. With no clear valuable service to provide, the company relies solely upon the sales of other companies' deals. The perceived return on investment (or value) of the service to the buying public is high. A customer buys the “deal” at a sharp discount, and consumes it for a perceived high return. (Spend $25, get a $50 value.) Whether or not the service or product was ever actually worth $50 is not relevant, as long as the purchaser perceives that it was.
The selling merchant expects decreased revenue on the service/product. However, the merchant hopes to gain increased exposure, new customer loyalty, and by using Groupon, access to a previously untapped customer base. However, these are all hopes, not guarantees.
A better example of a third party business model that is not much more than a conduit for business activity, but manages to offer added value, is eBay (NASDAQ: EBAY). eBay offers technology behind their site (the bidding) that the average retail business would not have. If eBay were to disappear tomorrow there would be a noticeable absence in the marketplace. Many companies rely on eBay as their selling model. Comparatively no company would be wise to invent a business that operated solely on the Groupon method.
Groupon does not have any real formidable competition aside from LivingSocial (partially owned by Amazon (NASDAQ: AMZN)). With nearly identical business plans and offerings, LivingSocial boasts 70 million members worldwide; as of June 30 Groupon had 38 million active customers, an increase of 65% year-over-year.
However, eBay has just announced “Lifestyle Deals,” an offering that looks an awful lot like Groupon. The auction site will offer daily deals on services (not products - that's a different offering within in the site) to members that are expected to be very similar to the customers of LivingSocial and Groupon.
More competition may be a very good thing in the “daily deals” market. Groupon currently has 53% of the market share for daily deals. However, eBay's current membership, business partners, and deep pockets may make it just the company to give Groupon a run for their money.
Groupon is attempting to change its stars with a new product offering. The company recently announced “Groupon Payments,” a mobile payment system that can be used for any credit card transactions, not just Groupon deals.
The new payment program is available for iPhone and iPod Touch users. Participating merchants can get a free “dongle” for swiping credit cards (an attachment you put on your phone/pda), or pay for a “slider” to swipe cards through. Presumably, a merchant can sell and conduct a full transaction from anywhere with this mobile technology. Groupon will charge a 1.8% transaction fee; in comparison, PayPal's mobile payment offering, “PayPal Here,” charges 2.7% per transaction. Square, another mobile payments provider, charges 2.75% per swipe (not per transaction), or a flat fee.
But this begs the question, just like the lack of a strong need for a daily deals provider in the marketplace: is there a demand in the marketplace for mobile payments? It is nice to have, it is great for some types of merchants to have the ability to swipe a credit card on demand, rather than get to a cash register, but it is not much more than a bonus.
Can another window dressing really save Groupon? Only time will tell.
Compare and Contrast
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ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, eBay, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.