Update 11/1/2012: Groupon valuation is back in news because of its rival LivingSocial’s woes.
In Amazon’s 10-Q filing late Friday afternoon, it disclosed that Living Social saw revenue of $372 million for the nine-month period ended Sept. 30. While that is up 120% from the same period last year, it reflects third-quarter revenue of just $124 million – down 10% from the June period.
If that sequential drop reflects an overall weakness in the daily deals business for the third quarter, then it implies potentially disappointing results for Groupon when it posts its own results for the period next week,
When valuing a company’s stock it pays to understand what pressing customer needs it serves and what unique value it adds. That is assuming you are Benjamin Graham, Warren Buffett type investor who takes the time to understand the business before investing.
Business model is value-creation and value share. A business that creates net new value for its customers gets to share in it. A business cannot get its share of value it did not help create, let alone grow exponentially.
If you are such an investor then Groupon’s announcements about lax controls should not come as a surprise to you. I am not referring to the $2 drop in its stock today but the news that led to it.
It is hard to describe Groupon’s business. In fact even Groupon is not clear about what it is.
For starters, it is a two sided market. It essentially brings together small businesses on one side and end consumers on the other side.
In general a two sided market adds value by unlocking value, creating new value or removing inefficiencies. It then gets its fair share of the net new value added. A two sided market must be consistent in its positioning – it must serve as the enabler for the jobs the two sides are seeking to do. There should be no asymmetry.
Take for example, eBay. It positions itself as the market place for buyers and sellers to find each other. No asymmetry here. EBay adds value by enabling transactions that otherwise would not have been possible.
What about Groupon’s role as two sided market?
What is its positioning to deal seekers? It tells them about, “one ridiculously huge coupon everyday” and its tag line is, “Collective Buying Power”. In other words it wants the deal seekers to hire it as a sales channel to buy products at steep discounts.
What about its positioning to small businesses? It tells them about, “guaranteed new customers”, “big exposure”, and “measurable marketing”. The story line goes, “these customers fall in love with your service and visit you again and again, paying full price”. In other words it wants the businesses to hire it as a marketing channel.
That is asymmetry (to put it mildly) in its messaging. Groupon cannot be a sales channel to acquire ridiculously huge discount and a marketing channel to acquire valuable customers at the same time.
What value does it add?
Businesses bring value to the table in the form of 50% off discount. Deal seekers add no value but get 50% off. Groupon gets its share of 25% from the businesses.
You bring a full pie.
Give half of it to my email subscribers.
Give half of what is left to me.
Take home the rest and wait.
It will not only grow to become a full pie, it will multiply into many full pies.
To repurpose Omar Khayyam, “the deal seekers having scored a deal, move on. No level of customer service will bring them back to pay full price for your cupcake they can get for 50% with their next coupon in the bakery next door”.
There is no net new value add. Just value distribution – from businesses to deal seekers and Groupon. Groupon cannot take its share of value it did not help create.
So we have a business that most do not understand, even it does not have clarity on the needs it serves and adds no new value. How can you place a valuation on such a business?
Surely you are not surprised that such a confused business finds itself again in the accounting hot water?
There is a WSJ report that SEC may investigate Groupon. I see no reason for such an investigation at the expense of taxpayers. If irrational investors want to bet their money on a business they do not understand or chose not to understand, why should they be protected?
Iterative Path 
Kirk
You are correct I am using 25% on the original value, it is indeed 50% of sales.
If they consistently position themselves as a sales channel to clear excess capacity that cannot be inventoried they have a role to play.
They cannot say to consumers, make Groupon an everyday activity and tell businesses, get full price customers.
-Rags
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I agree completely with you and believe there is no way Groupon can be a sustainable long term business model unless it evolves.
I know you are including the whole price (the “face value”) of the deal into account when stating that Groupon takes 25%, however I think it is more accurate to state it as it stands for the business: that Groupon takes 50% of the cut. In my opinion, this is one of its weakest points and why more and businesses are not falling for its line. There is less and less proof of loyal customers, but rather “deal-hungry” customers who just go from one groupon deal to the next… and for 50% of the profit, more and more legitimate businesses are refusing to partner with Groupon. I would argue that there is some benefit in the “group-buying” idea, but it will never draw the kind of businesses that will sustain it until Groupon loses its greed and drops from taking 50% of the cut to a legitimate 20-25% (of the business cut, not the face value of the deal).
Thanks for another insightful post.
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