[danso]

I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that:

a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers

Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it.

Color, in contrast, had none of the above.

[enraged_camel]

>>It was the first big success in its space

Success that is not sustainable is not success.

>>and a lot if its downfall comes from how easy it is to copycat it.

No, I don't think so. The real (and perhaps the only) reason Groupon is not sustainable is because the fundamental assumption that the business model rests on turned out to be false. Let me explain.

The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business. The assumption, which Groupon's sales folks used aggressively to push sales, was that a significant portion of those consumers would like the business so much that they would become repeat customers, thereby (in the long run) offsetting the cost of the original discount. In the end, the business would turn a profit.

Except it didn't work that way.

What ended up happening instead is that the vast majority of consumers never actually went back to the business. The reason is simple: while they could justify paying X dollars for the business's product or service just to try it out, they couldn't justify paying X times three or four. Because of this, most Groupon clients (the businesses) end up losing money, and never offer a second or third discount via GroupOn.

This is why GroupOn has such a huge number of sales reps: they need an ever increasing number of clients in order to postpone the inevitable sinking of the ship.

[webwright]

"Because of this, most Groupon clients (the businesses) end up losing money, and never offer a second or third discount via GroupOn."

That's false.

in Q3/2011, 33% of Groupons merchants were people who were doing it for a second time. That number was up to 56% in Q1 of this year.

The deals are getting less lopsided-- $12 for $24 at a restaurant where it's challenging to eat for anything less than $50 is a pretty good buy for a restauranteur. With most of their costs tied up in fixed costs (real estate, etc), they aren't losing much (if any) on this a deal of this size.

You're also somewhat wrong when you say, "The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business."

That was part of the original idea, but there are a few other benefits. 1) Filling empty seats for businesses whose costs are largely already incurred 2) It's an effective cash advance for the business- they recognize the revenue quickly (it's like a Kickstarter campaign).

[patmcguire]

I don't think you're correct about the cash advance - as I recall the merchant only gets paid when the coupon is redeemed. Groupon keeps the float and the breakage.

[webwright]

Here's a recent state of things... It's a bit of a moving target, but they get a big chunk up front.

http://venturebeat.com/2012/05/07/groupon-tightens-its-payme...

Another thing to realize is that they get the money REGARDLESS OF WHETHER YOU REDEEM IT. EVER. Depending on the type of Groupon, upwards to 20% of them are never redeemed (this is a dirty secret of gift cards, too).

[cellis]

"Success that is not sustainable is not success"

I guess you think everything ever invented is a failure then?

[angryasian]

I think another point to mention with the popularity of social media, deals could be offered directly once a sustainable customer base was built using the initial audience from groupon. Cut out the middle man.

[prostoalex]

>> Success that is not sustainable is not success.

You're confusing the product and the company. iPod in your definition is not a success, and neither is Sony Walkman.

[antr]

Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.

[danso]

...But not Bill Nguyen (at least with Color).

I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute.

So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.

[hkmurakami]

>Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.

Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.

[antr]

who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.

[TeMPOraL]

GroupOn had also this ridiculous idea that small businesses can earn return customers by offering them extremely huge discounts.

[megablast]

If you look at it as a form of advertising, it is a great idea. And I am sure there are a number of returning customers.

[Retric]

I suspect the real problem was the size of their discounts. Selling a 40$ bottle of wine wine for 20$ attracts far more people that buy 20$ wine than people who buy 40$ wine. So unless you can afford to keep selling at 20$ the odds of repeat bushiness is low.

Really when it comes to coupons there are three options that actually work. You can always have a sale, you can make it a pain to use, or you can limit yourself to 10 to 15% off.

[pyoung]

That would have definitely been the much more sustainable approach. Although I have a feeling that offering discounts of 10-15% would not have resulted in the hysteria that they originally generated and thus would have limited traction. It is one of the many ironies of their story.

[carbocation]

Well, that is the proposition. It turns out it may be false, which in fact would explain why Groupon is doing poorly.

Giving discounts may induce the most price sensitive to use your service. They will continue to be price sensitive, and stop using your service once the cost returns to normal.

If the opposite were true, and if business actually did profit from this approach, then it is likely that Groupon would be killing it.

At the end of the day, some types of retailers find ways to profit even off of the price sensitive, but it seems to be the case that the same is not true for most Groupon-trying businesses.

[tesseractive]

A hypothetical ideal business in this segment would find a way to profit off of attracting people interesting in sampling new businesses for long-term patronage rather than making its money off of the price sensitive. The idea would be that you would find a way to make the proposition most appealing to people who are looking for a new... hairstylist/florist/gym/supermarket/whatever, and either avoid targeting offers at people who are likely to sample at a low price and move on, or make the offer less appealing to them.

This has been a key part of the mailing list business for many years -- lists that target people who have recently moved, gotten pregnant or had a baby, gotten married, and so on. Special offers with unusually good deals are then offered, because the chance of converting a percentage of the recipients into long-term customers makes it worth it.

If this kind of business model has been translated to online effectively, I'm not familiar with it. Certainly some of that effect can be achieved with the right search keywords or the right websites to advertise on (e.g. baby name sites), but businesses like Groupon and Living Social have brought in many more price sensitive customers than actual long-term business prospects, which is one of the big reasons why they are not more successful.

[padobson]

I don't think the author of the post is arguing that GroupOn isn't a good product, it's just not a sustainable business. The company they build fills a need for its customers, but it doesn't make money for GroupOn by fulfilling that need.