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Groupon: Problems With Customer Loyalty and Marketing Costs

Prior to Groupon’s IPO last year, I wrote a few articles that were critical of the company. In one of my articles, I noted problems with loyalty of customers and merchants:

  • It’s expensive to get new customers. Sure, a large email list is nice. But how much does it cost to get people on it, and more importantly, how much does it cost to get buying customers on it?
  • Only about 21% of subscribers have purchased a Groupon since January of 2009. The company has nearly 143 million subscribers, but less than 30 million of those have actually made a purchase. Worse yet, only 16 million (or 11%) are repeat customers, buying more than one Groupon since January of 2009.
  • There is no proof that merchants realize a good return on their investment. The roadshow includes one merchant who loves Groupon and has good results. The company says that merchants love Groupon because it is risk free, helps merchants get large volume, and has a high ROI. Says who? A study done last year found that 32% of merchants were not profitable with their Groupon promotions, and 40% would not do a Groupon offer again.

Lo and behold, an article this week on Bloomberg’s website shows my concerns were right on point:

About half the businesses that have offered an online deal- of-the-day in the past aren’t planning to do so again in the next six months, according to a survey published on Jan. 2. The study, by Susquehanna Financial Group and daily-deal aggregator Yipit, showed that merchants were concerned about a low rate of repeat business from new customers gained through such offers.

I have also criticized the high marketing costs and the failure of the Groupon to turn that marketing into profits:

First, I compared the marketing expense per Groupon sold to the revenue per Groupon sold (numbers highlighted in blue below).  I divided the total restated marketing expense in 2010 by the number of Groupons sold, to arrive at a marketing expense of $9.39 per Groupon sold. This compares to revenue of $10.33 per Groupon sold, based on the restated financials… which means that marketing costs are 90.9% of revenue!  Groupon is barely outpacing its marketing costs for each Groupon sold. And there are many other costs in running this business.

Next, I compared the marketing expense per new customer compared to revenue per customer (numbers highlighted in yellow below), since Groupon has stated that new subscribers and new customers are a focus of the company. I divided the restated marketing expense in 2010 by the number of new customers gained in 2010, to arrive at a marketing expense of $32.85 per new customer. Compare that to restated revenue per customer of $34.65, and you realize that the prospects for this business are dim, particularly when almost all of the customers in 2010 were new customers! The company has been spending a ton of money to get new customers, with no promise that the marketing costs will go down or the revenue per customer will go up.

Additional criticism in the Bloomberg article supported my comments:

Groupon, meanwhile, has been criticized for its ballooning marketing expenses (GRPN), which have led to rising losses.

The company has more than 10,000 employees, up from 37 in June 2009. It spent $613.2 million on marketing in the first nine months of last year, resulting in a net loss of $238.1 million. Marketing costs will increase in the coming months as stores become less inclined to offer Groupons because they aren’t seeing users return, Mulpuru said.

“It’s been like a marketing blitzkrieg that’s grown the business to the size that it is,” Mulpuru said. “They were using investor money to subsidize these offers for so long. Then what merchants start recognizing is, ‘We’re just not getting new customers.’”

The price of Groupon’s stock has been dropping daily for the last week. Today it was hovering between $17 and $18, below the IPO price of $20. Is this where I say I told you so?


  1. I’m in the minority as I have bought more than one Groupon since then.

    Your points are right on and reminds me of the I Love Lucy episode where Lucy and Ethyl lose money on every bottle of salad dressing but plan on making it up on volume.

  2. Denise

    I have purchased two Groupons and several other assorted wagjags, dealfinds, etc. but I have not been a repeat customer of any business I purchased from. I’m not proud of that, but it comes down to cost and competition. If I buy a haircut for $15 that they somehow value at $60 and go, the place is super busy and I don’t end up being satisfied. Or, I go and don’t mind it, but since I’m introduced to the place paying $15 I’m hesitant to quadruple the price next time for the same thing.

    Also, next time I want a haircut I could just hang on and wait, because inevitably another groupon-style offer will come down the pipeline. Anyone can criticize my comments here, but I don’t think I’m in the minority.

  3. Tracy Coenen

    Denise – I think you are a typical Groupon customer. You are looking for a good deal and are happy when you find one. But the business model does not lend itself to you becoming a repeat customer of these businesses.

  4. Jake

    OK, nice statistics. But in all reality, that’s still a nice number and is certainly growing in a positive direction.

    And MOST IMPOTANTLY, to add to this report – as a savy inverstor once said, “find a company that understand and like – and buy that stock”. Groupon rocks and their word of mouth advertising such as Facebook is the best you can hope for.

    I love Groupon, I believe in their concept and with good management, I am staying long on Groupon for the long term!

    Keep up the great job GRPN!

  5. I disagree with many of the analysts who believe that they will do well to Groupon.
    I think it’s a company with great potential, competitors are not even half and business are mere imitators and copycats are not usually good.
    I only see a problem that is spending on marketing of the company, but it is encouraging that in the last press conference Groupon CEO is responsible for putting that focus on his press conference and I imagine are seeking solutions to this issue.
    I also think that the balance of February 8 will surprise more than one analyst.
    I think Groupon is a very good product and has a lot of growing, I’m sure it will succeed.
    Do not forget that according to statistics of Goldman Sacks, Groupon would end with her bleeding in the second quarter.

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