This is a good example of why MBAs frequently make lousy entrepreneurs. So much in this article is wrong. First, Groupon actually does have more network effects than a simple retailer like Amazon (save reviews). Shoppers go where the deals are, merchants go where the shoppers are. Bigger lists mean better targeting. Etc. That's why Groupon has continued to dominate despite the plethora of clones.
But the bigger problem is the implication that Groupon will not adjust its economics in the future. Groupon could slash SG&A, sales and marketing to become wildly profitable and still grow quickly. It's actually quite amazing how long Groupon has managed to take a whopping 25% cut. This is likely to diminish as discounts become smaller and merchants negotiate better terms. But still healthy enough to support a very large business.
> businesses should become profitable before they become big
The opposite is true of most or all of the big internet businesses.
> Groupon's fundamental problem is that it has not yet discovered a viable business model
Taking a 25% cut of sales is a fantastically viable business model.
> I have no problem letting investors finance my cheap consumption. But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off.
These statements are just wrong. Merchants are financing your cheap consumption. Who is giving merchandise away for 90% off? Where does that come from?
I am far from a Groupon apologist but so much of the "analysis" on the company is so bad. Comparisons to Pointcast, Pets.com or Webvan are totally unfounded. This company is generating massive cash flows.
But the bigger problem is the implication that Groupon will not adjust its economics in the future. Groupon could slash SG&A, sales and marketing to become wildly profitable and still grow quickly. It's actually quite amazing how long Groupon has managed to take a whopping 25% cut. This is likely to diminish as discounts become smaller and merchants negotiate better terms. But still healthy enough to support a very large business.
> businesses should become profitable before they become big
The opposite is true of most or all of the big internet businesses.
> Groupon's fundamental problem is that it has not yet discovered a viable business model
Taking a 25% cut of sales is a fantastically viable business model.
> I have no problem letting investors finance my cheap consumption. But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off.
These statements are just wrong. Merchants are financing your cheap consumption. Who is giving merchandise away for 90% off? Where does that come from?
I am far from a Groupon apologist but so much of the "analysis" on the company is so bad. Comparisons to Pointcast, Pets.com or Webvan are totally unfounded. This company is generating massive cash flows.