Surely you are not surprised by Groupon woes?

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?

We can turn Groupon into a daily habit for consumers

Logo of Groupon

The Wall Street Journal interviewed Groupon CEO Mr. Andrew Mason about his IPO and his business. The Journal throws a whole bunch of softball questions to Groupon CEO Andrew Mason.

They either deliberately failed to ask or focused on the wrong things like these,

  1. Valuation – It is perfectly acceptable for a company to expect and set any valuation. It is up to the market to buy the shares at that price or not. Why question him on the valuation?
  2. Asking about current stock price: What is the point of asking about the stock price to any CEO? When did anyone answer anything other than,

    “I’m aware of it [stock price], but I think as a company we aren’t driven by it. It’s a futile exercise to be responsive to the stock.”

  3. On the employee memo leaking out: Mr. Mason asnwers,

    “If I knew it was going to leak,”

    and the  Journal reporter lets it slide. Really?

  4. Questioning his maturity: This is an insulting question. Ask about his challenges and how he rounds up his gaps with an executive team.
  5. Asking, How important is profitability?:  Really? Now who is being immature, excuse me, being unaware of the number one goal of any business? This question lets Mr. Mason talk about the growth, market share etc etc.

What questions they should have asked instead?

  1. Question the contradiction–  When Mr. Mason said,

    discount to deliver more buying power for consumers, as well as solve better inventory management for merchants, delivering them more profits

    The question is how can you say more buying power to customers and more profits in the same sentence? Profit implies share of net new value created. What is the net new value created?

  2. Is it  a sales channel or marketing channel?  When Mr. Mason said,

    solve better inventory management

    The question here should have been – are you a sales channel to dispose of excess inventory without cannibalizing  current full-priced sales or are you a marketing channel to acquire new full-price customers?

  3. What happens when Groupon turns into a daily habit?
    The title of this article is a quote by Mr. mason in the article. What would happen if customers are used to the  “ridiculously large discount” they get from Groupon? What does this mean to the small businesses?
  4. How does the upfront investment pay off in the long run? – When Mr. Mason said,

    There’s an upfront investment that we know pays off over the long-term

    The question should have been, is that a guarantee? hope? insurance? promise?  What metrics are you providing to small businesses to measure that pay off?  There is no data or assurance that deal seekers come back. Besides didn’t he just say, “we can turn Groupon into a daily habit for customers”?

  5. Did you read the book?
    Why not buy a copy of this book and give it to all the small businesses before signing them up to do Groupon?