Thursday, September 01, 2011

Groupon's Journey To Reach Profitability

It has been a while I haven't read the great blog of Laurence Faguer, one of the best expert in customer relationship management and retailing I know in France.

Laurence has wrote a very interesting article about Groupon, trying to explain its business model and also the path remaining to become profitable. Groupon is for sure one of the hypest company in the Internet business right now. What I find fascinating about the company has been its ability to generate revenues at a very early stage of its development, on the contrary of companies like Twitter for example. Of course, Twitter and other Facebook are "social network" or web 2.0 companies. The business model is for sure not the same:
  • Social media needs audience (and therefore focus on having the largest number of users as possible) in order to get the interest of announcers and advertizing companies.
  • Groupon is actually a more conservative companies. It sells somehow some advertizing space, but its business modell, to me, is closer to Google.

Laurence in her French article explains some very important metrics :

2010 Annual Revenue = $713,365,000.
2010 Annual Loss = $413,386,000.

2011 Q1 Revenue = $644,728,000.
2011 Q1 Loss = $113,891,000.

83,000,000 members
28,100,000 coupons bought

15,800,000 customers (about 2 coupons/customers bought)

Average revenue/coupon bought: $25
Average revenue/buyer: $ 50.

Marketing investments in 2010 = $241,000,000
Marketing investments in Q1-2011 = $179,000,000

How Groupon Earns Money
Groupon sends about 1 coupon to all its members (65,000,000 members in Q1-2011), for 90 days.

28,094,000 Coupons are sold
Conversion rate = ( 28,094,000) / (65,000,000 * 90) = 0.48%

… 1 out of 208 members bought a coupon

En Q1-2011, Groupon invested $8 in marketing/coupon sold.
Marketing represents 32% of Groupon's investment in Q1-2011.
46% of the revenues comes from the Northern American market.

If the cost to get a customer remains around $6 to $9, to break the even pints Groupon will need to seel one extra coupons/customers.

Laurence's Analysis
The return on investment ratio remains in the average of a traditionnal e-commerce company.

The Pareto law (20/80) is true in that case: 20% of customers and 80 % of non buying members.

Groupon needs traditionnal advertizing media to get awareness and expand its members data base.

Groupon needs to adopt CRM strategies to trigger a second buy/customers in order to reach profitability.

I hope Laurence doesn't really mind I took her post to translate, but I highly value this insight.

My opinion

Groupon remains a very traditionnal company, as its main advertizing media remain emailing.
I totally agree with Laurence, I believe that Groupon needs to work on its customer relationship management strategy to gets loyalty from its members and to make each customers more profitable.