Groupon’s Third Act

Early this November, Groupon found a new CEO in its former COO, Rich Williams. Williams takes over for Eric Lefkofsky, who had been CEO since founder Andrew Mason’s termination over two years ago. Lefkofsky will return to his previous role as chairman.

Two weeks into his new role, Williams released a blog post that highlights some of his plans and what he believes are misconceptions about the company. Mason, who has no role with Groupon these days, also penned a short post explaining why he still roots for the company.

This is a good time to take a look at Groupon, not only to clarify where it has been but also to reassess where it might be headed. (Disclosure: I was employed by Groupon from 2011 to 2013.)

Both Williams and Mason are frank about past mistakes. They grew too quickly. They didn’t respond appropriately to criticism. Accounting was a mess. The business model required too much labor in place of operational efficiency and scalable systems. But both are optimistic about the core problem that the company is trying to solve: e-commerce for small and local businesses.

One of the myths called out by Williams is that Groupon is an email daily deal company. He’s right; for years, the company has been more of a marketplace and less of a single daily email operation. The limited number of vouchers or limited amount of time to buy created a sense of urgency and a novel buying experience, but it didn’t really serve customers or merchants appropriately. First they began doing multiple targeted emails a day, then experimented with open-ended campaigns, trying to help merchants manage the flow of customer acquisition better.

One of the early issues Groupon had was trying to impose a minimum 50% discount on all merchants that featured on the site. For something with low marginal costs, such as a yoga studio, this isn’t an issue. For retail goods, however, a 50% discount is much harder to stomach. Some merchants were loath, from a brand perspective, to be seen as discounting at all.

And this brings in a theme I found interesting in Williams’s post. He mentioned both “an increasing number of market rate and low discount offers” and “more opportunities to run on our platform at lower discounts and with market rate offerings”. If Groupon’s first transition was from being a daily deal email company to a collection of deals, its next will be moving from deals to a true marketplace of goods, services, and activities at a wide range of prices.

On the marketing side, Groupon had a strong proposition since its first iteration. Merchants could do far worse than to get exposure to thousands of opted-in potential customers, have detailed analytics on where and with whom their offer was being purchased, and get prepaid before providing any service, all at no charge.

But it took Groupon some time to adjust to the reality of discounting, with beginning to feature deals at a range of different discount levels as well as having more flexibility with the merchant revenue split to better take into account different cost structures. Merchants often still felt like they were losing because of the discount, regardless of the marketing, customer acquisition, and payment benefits.

For a host of reasons, Groupon became (and continues to be) a company most people root against, oftentimes because of a mistaken belief about how the offer works. Most analyses and news articles I see work off of bad assumptions about margin splits and even the core business model. I continue to be amazed at some of the lazy writing done about the company in mainstream business media. (It’s worrying to me epistemologically as well: what are the odds that the only business they are analyzing poorly is one that I happen to know well?)

While discounting indiscriminately is a sure way to leave money on the table, effectively segmenting your customers is critical to increasing revenue and profit. Almost every company has some degree of price segmentation for different types of customers, and having effective segmentation can have a strong positive influence on revenue.

Mason is correct in saying that local e-commerce remains a very underserved market. Enterprise software tools for inventory management, point of sales, marketing, etc., are typically not geared toward a small local operation. Finding your customers and knowing what to charge is tough. Groupon’s promise, therefore, may lie in helping local businesses manage this process better.

While Williams cites growing too quickly as one of the mistakes Groupon made in the past, he is adamant about plans to ramp up marketing: “First, we are dramatically shifting our marketing strategy in order to drive millions more new customers to our marketplace. Core focus and investment in new customers isn’t a nice-to-have for a business at our stage, it’s a requirement.”

Groupon needs to convince users that it is the go-to platform for discovering great local businesses. Discounting will remain part of that, but only insomuch as it can help merchants manage their inventory more effectively. In the past, Groupon has experimented with different discount levels for weekdays versus weekends, or even depending on the time of a restaurant reservation, in order to drive customers when they are needed. It isn’t hard to imagine a Groupon that allows merchants even more control over how and when they feature on the site.

Whether Groupon will “win” in local, of course, remains to be seen. Google, Facebook, Yelp, and others (many of whom tried and failed to copy Groupon itself) continue to compete for local marketing. They are certainly not alone in getting to know more about users and offering tailored marketing and sales to merchants.

But I wouldn’t count them out of a successful third act under its new CEO. If they are indeed moving toward a more comprehensive discount management and customer acquisition tool for local merchants and can execute successfully, they will have a very valuable service in their hands for small businesses around the world.