Friday, December 16, 2011

Assessing Groupon’s Strategy

Groupon, the biggest online daily deal site, faces many challenges even as it benefits from advantages as the leader in its industry. Groupon charges a high percentage from the deals it creates. It also has the largest member base of any of the online deal sites. As a publicly-traded company, however, it is limited in the types of deals that it can create. LivingSocial, because it is a private company that is able to raise capital from private donors, has used generous deals with zero or negative profits to entice subscribers. Its $10 for $20 credit to Amazon.com deal resulted in an overall revenue loss for LivingSocial but created thousands of new members for the site. The Whole Foods credit deal had a similar effect. Groupon already has a firm member base and would be more hurt by such a deal since investors would be weary of seeing a low margin on transactions. If Groupon wants to remain a heavyweight among online sites,

A major weakness of Groupon’s business model is the profitability for merchants that Groupon’s deals create. In recent months, examples of small businesses that have been hit hard by their deals through Groupon have resulted in a streak of bad P.R. for the company. Groupon’s response to criticisms has been weak or completely absent. Enthusiasm for the company has since declined as reflected by its stock price [1].

As Richard Rumelt detailed in his article “The Perils of Bad Strategy,”[2] a strategy has to reflect the challenges a company faces and craft a thoughtful response. Groupon has so far remained faithful to its primary and highly criticized business model of selling deals at deep discounts--leading many to believe that the company’s success will be short-lived. Despite the many critics, Groupon does not appear prepared to lessen its reliance on daily deals. The company’s vision is also shortsighted. To fix this, Groupon needs to revise its strategy to directly reflect this challenge. Advertising that demonstrates their commitment to helping merchants is a start. Creating deals specifically to boost consumer loyalty should be part of this strategy as well.

1. Smith, Randall and Grocer, Stephen. “Wall Street Cools to Groupon.” The Wall Street Journal. http://online.wsj.com/article/SB10001424052970204026804577098804223481254.html

2. Rumelt, Richard. “The Perils of Bad Strategy.” McKinsey Quarterly. June, 2011.

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