Trouble in Coupon Land

Groupon Fires its CEO

The problem isn't the management. It's the model.

Are you surprised that Groupon just fired its CEO? Are you really? Riddle me this: when's the last time you booked a Groupon?

If you're anything like me, it's been a while. A quick search of my inbox reveals that it is choked with Groupon offers, at least one or two a day. Martini tasting! Round-trip Bus Rides to New York! 44% off Jewelry by Kim Kardashian! (So much for their much-vaunted precision targeting of deals). But the last time I clicked on one was weeks ago, and only because of the vivid subject line: "I would check out these deals if I were you". I was concerned that having failed to grab my attention with exclamation points, they were escalating to threats.

But firing the CEO seems rather beside the point. The problem with Groupon isn't its management; it's the business model.

Coupons basically serve two purposes: advertising, and price discrimination. They either make people more willing to try a new service, or they let you sell to very price-conscious consumers while still charging your less frugal customers full price. Businesses were encouraged to view the coupons as advertising--to sell their products or services at very close to cost in order to attract new customers who would then come back once they'd discovered how awesome the firm was. But coupon buyers were pitched on the price discrimination side: for them, Groupon was about a constant flow of super-cheap deals, not a way to discover new businesses where they might become long-term customers.

The result was fairly predictible. The initial deals were good, because businesses wanted new customers. But the customers they got were extreme value shoppers; they only wanted to come in if they got a huge discount. Businesses essentially spent a great deal of money to overwhelm their staff and alienate existing customers with a flood of dealhunters, many of whom only spent the exact face value of the coupon, then never came back. (And tipped on the value of the coupon, enraging watiers and masseuses.) A few places went out of business due to the volume of excessive discounts.

So the businesses insisted on much less generous markups. And the bacterial pace of growth slowed, because the value shoppers didn't want a modest little discount; they wanted to get things basically at cost.

And the initial rationale that Groupon pitched--that the deal only kicked in if a certain number of people joined--never made much sense to me. A customer is a customer. In how many situations is a new customer worthless unless you also get 24 other new customers? I mean, there are some--fitness classes where you need to add another instructur, say. But this is a very small part of the Groupon universe.

You could see Groupon being a good way to get rid of products that are high fixed cost, low marginal cost goods. The cost of a hotel room, for example, is mostly in your hotel staff, the real estate, and the heating. It only costs a few additional dollars worth of soap, laundry, and utilities to put a body in that room. So you're almost always better off renting that room, even at a very low price--at least, as long as you aren't simply converting a full-price customer into a half-price customer.

The problem is that most of these sorts of products are travel products, and long before Groupon, the travel space was already crowded with discounters who performed this service for airlines, and especially, hotels. There wasn't a lot of free money to be picked up in the area where Groupon's model most obviously worked.

Moreover, to the extent that the model did work in other sectors, it would be very easy to imitate. (And it was, endlessly). Groupon's core asset is essentially a mailing list, and mailing lists don't have great network effects, or economies of scale, to protect their owners against competitors.

I'm not saying that I foresaw Groupon's rather sudden decline: I was skeptical, to be sure, but then, I was also a little dubious that Amazon would survive. I am saying that the board is looking in the wrong place for a solution. They don't need a new CEO. They need a business model that works.