Groupon: A comprehensive Strategy TM583 – Course Project By Jesse Marcano Cory Shenault Clifton Leonard Table of Contents Introduction2 Section 1 – Strategy3 Section 2 – Core Competencies6 Section 3 – Industry Dynamics10 Section 4 – Technology Sourcing and Internal Innovation13 Section 5 – Product Development Strategy16 Section 6 – Strategy to Protect Innovations17 Conclusion20 Bibliography20 Introduction Groupon did not invent the daily deal website; however, they introduced the concept of using the group buying power of online shoppers to receive substantial discounts from local merchants.
Their model has been easy to replicate, which has lead to many clones operating in the same market as Groupon.
As one of the first entrants into this market, they have gained the name recognition to allow them to partner with a plethora of local businesses. Additionally, their massive data warehouses contain extensive data on customer buying habits and which deals have been most successful. The use of advanced analytics to segment this data lets them target customers with the most relevant deals. These advantages have allowed them to grow more quickly than any business in history.
With continued innovation, they should be able to sustain this tremendous growth and help maintain their top spot in the market. Section 1 – Strategy Hyper Local Marketing, E-commerce, and social networking are the core competencies of Groupon which is a group-based social e-commerce service that launched in November of 1998. It was initially part of The Point platform which is a collective platform for activists and philanthropists. The Point is where like-minded people meet in order to further the progress of their business endeavors.
The Point was used by people to organize group purchases (such as magazines subscriptions) by people. “It was this site that inspired Andrew Mason to create Groupon and begin using group buying power to create a win-win for local businesses and their customers” (Mason, 2009). Created by a 29 year old music from Northwestern, Andrew Mason has probably built the fastest growing web site in history. The name of the organization blends “group “ and “coupon” and they advertise online daily deals and discounts, in some cases up to fifty percent off, to local businesses that offer goods and services.
The deals and offers only work if a certain number of residents buy the same good(s) and service(s) on the same day. According to Christopher Steiner, “it’s a cents-off coupon married to a Friday-after-Thanksgiving shopping frenzy” (Steiner, 2010). The vendors, such as restaurants, yoga studios, and boxing gyms gain exposure in return. Obtaining a much larger customer base than they previously had before Groupon issued the offers on their web site. Groupon occupies 85,000 square feet of space in what was once Montgomery Ward in the River North neighborhood of Chicago.
In 2010, Morgan Stanley put together a report for Groupon and projected the company to pass the $500 million mark in revenue that same year. Groupon was able to raise $135 million with a larger portion contributed by Digital Skye Technologies which is a Russian investment fund which also contributed monies to Facebook and Zynga. After raising those monies, Groupon’s valuation was estimated at $1. 35 billion which enabled Groupon to become the second fastest company to reach a $1 billion valuation behind Youtube.
Groupon’s bottom line was reported to be in the black seven months after its inception. Smaller companies with insufficient budgets for marketing and promotion are able to generate more sales with the model that Mason has created. Once such strategy was demonstrated in New York in May of 2010 when Groupon offered tickets to an exhibit for King Tut for $18 per ticket which was just above half price. The marketing idea sold 6,561 tickets and earned $120,000 in revenue and the exhibit incurred no marginal cost at all.
Groupon in return, was able to receive about half of the earnings from this offering and their most popular offering is a $12 ticket for an architectural boat tour in Chicago that normally sells for $25. “In May of 2010, Groupon moved 19,822 tickets in eight hours and split the $238,000 profit with the tour operator” (Steiner, 2010). Groupon has since established a presence in 88 U. S. cities as well as 22 countries including Poland, Russia, Chile, and Turkey. With competition getting stronger in Brazil and New York, Andrew Mason hired 250 salespeople and 70 writers.
Many of those writers were chosen from the improv comic strip in Chicago to create witty and unique sales pitches for upcoming deals. “We want to do for local e-commerce what Amazon did for normal consumer goods,” said Mason (Steiner, 2010). As of March 17, 2011, Groupon has acquired more than 70 billion subscribers worldwide. Groupon’s primary strategy for growth is sales and marketing. They use complex analytics to segment customers not only by city but more specifically, by neighborhood.
They target these customers with marketing that is close to home and relevant to their demographic. They provide local businesses with instant access to droves of local customers and in exchange they split the revenue from the sales of “groupons” with the local businesses. Groupon’s market name recognition and vast data warehouses containing intimate customer data give them an advantage over competitors. They use this data to buy Google Ad Words that will attract the most customers and provide an extremely high ROI that hasn’t be matched by competitors.
Groupon also works on the strategy of collective buying power which in turn relies on its customers to make sure that everyone gains something. Goods and services are offered by Groupon for local businesses once a day in each city that Groupon has a presence. In 2010, Mason announced that Groupon would offer multiple deals per day in many markets in an effort to acquire more small business clients. Offers will be based upon geographic location and customer’s past purchases and an algorithm will be used to mete out the offers based on that criteria.
For instance, a jazz fan in Bronzeville would not receive a deal for half-price bar hopping tour buses in Wrigleyville. Consolidation is another of Andrew Mason’s strategies. In May of 2010, Mason purchased Citydeal, a Berlin based organization. CityDeal is another group-buying site that employs six hundred people and serves eighty cities in Europe. Mason wants to purchase more organizations abroad but explains that it is not so easy to be an outsider and figure out the local habits of consumers in those nations.
Groupon has the ability to expand in many markets and turn a profit. Mason says that a yield of 20 deals per day in a metropolitan area like Chicago implies about 5,000 retailers per year, per city. One Hundred deals per day are now posted by Groupon in the U. S. and Mason thinks that that number can be increased by about fifty percent each month increasing to four hundred by the time January of 2011 comes. Section 2 – Core Competencies In their 1990 article entitled The Core Competence of the Corporation, C. K Prahalad and Gary Hamel, coined the term core competence.
According to the article, core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. They also developed three tests that are useful for a company to help identify their core competence areas. These tests state that a core competence should: 1. Provide access to a wide variety of markets, and 2. Be a significant source of competitive differentiation, and 3. Be difficult for competitors to imitate. In the strategy section, we defined Groupon’s Core Competencies as: Hyper Local Marketing, Search Optimization, and Advanced Analytics.
In this section we will apply Prahalad and Hamels test to these competencies and see if they can be identified as core competence areas (Campbell, 1997). The first test of core competence is to provide access to a wide variety of markets. The first core competence area is Hyper Local Marketing. Although this concept has been around for years, it has not been applied on a mass scale by an internet marketing company before Groupon. Before Groupon, the best example of hyper local marketing is the bulletin board in your local coffee shop.
Groupon has been able to attract a variety of diversified clients in industries including restaurants, spas, health and fitness companies, boutique retailers, movie theaters and sporting events. Another area of core competence is the use of advanced analytics and SEO techniques. Predictive Analytics is the use of advanced statistical models to determine possible outcomes from huge datasets. In a marketing environment, decision tree, regression and clustering analysis is used to predict which customers will be more likely to make a purchase based on a specific campaign.
Another branch of analytics is web analytics which helps to identify how long customers were on your website, what links they clicked and if they eventually purchased a product. Groupon has teams of analyst dedicated to stretching the ROI on all of their campaigns. They also have huge data warehouses containing intimate details of customer purchasing and browsing activity. This advanced analysis gives them a competitive advantage in the various industries they promote via the web and email campaigns to their over 70 million registered customers.
The second test of core competence is to be a significant source of competitive differentiation. Groupon excels at hyper local marketing. They are primarily a sales and marketing organization, and have the name recognition and media exposure that differentiates them from competitors. They are able to offer consumers a wider array of deals than their competition because they are able to use this name recognition to partner with more local companies. Additionally, because of the focus of the organization on sales and marketing, they have a much larger sales force than their competition.
Groupon now offers multiple daily deals in each market while other deal a day websites still only have the ability to offer one every day (Stone, 2011). Groupon utilizes analytics extensively to segment their target market and present offers to them that will be relevant based on geography, purchasing habits and many other demographics. Their largest expense is the Google Ad Words pay per click campaigns. When Groupon runs an offer, their optimization is so exact, that a search for one of the featured offers will usually present the Groupon website before even that of the company itself.
Competitors like Living Social, You Swoop, and Buy With Me have tried compete with Groupon with internet marketing campaigns, but they neither have the budget or level of expertise to surpass Groupon in this area. The final test of core competence is being difficult for competitors to imitate. Groupons success in the hyper local daily deal market has developed a lot of competition. This has led to Groupon developing Groupon Now, an instant service to be used on smart phone that delivers multiple deals to consumers based on their actual location.
In a recent interview in Bloomberg Businessweek Andrew Mason, Founder and CEO of Groupon stated that he believes his army of sales reps and their existing relationships with merchants give his operation an insurmountable advantage. Since stores and restaurants probably won’t have the time to administer such deals on more than one or two services, Groupon Now could conceivably yield the kind of merchant lock-in that Groupon 1. 0 did not (Stone, 2011). Analytics is driven by data. Groupon distinguished itself by harnessing its wealth of data to show what discounts work in what markets.
That gives them an edge with merchants, and allows them to accurately identify which category of deals and companies are in the ripest categories for its sales pitch. They also seem to have tuned in on the algorithms Google uses to rank pages on its search engine. They are able to spend less on each search campaign than their competitors while generating better results and more revenue. Even if competitors try to imitate the analytics they cannot afford to go head to head with Groupon in a bidding war for Google Ad Words (McCollough, 2011).
By applying Prahmad and Hamels tests of core competence it can be confirmed that two of Groupon’s core competence areas are hyper-local marketing and advanced analytics. They also continue to innovate and develop new business models that will continue to keep them in a dominant position in the deal a day market. This has helped them to be one of the fastest growing companies of all time. Groupon’s deal-of-the-day business is set to generate $3 billion to $4 billion in revenue this year, up from $750 million in 2010, according to two people familiar with the upstart’s finances.
Groupon was valued at $1. 4 billion last April, sought funding at a $3 billion valuation in November and snubbed a $6 billion offer from Google two months after that. According to the Bloomberg Business week article, Groupon has been meeting with bankers to discuss a potential initial public offering that would value it at up to $25 billion. Section 3 – Industry Dynamics In 2008, Groupon launched and started with 100% of the daily deal market. The craze that Groupon created is due to its strategy. Groupon’s strategy is to ind services and goods people actual want and make deals with companies to offer a discounted price for those services or goods. The only catch is that in order for the coupon to be valid, certain amounts of people mush buy-in to the offer. With out-of-this-world deals that include stays at 4-star hotels, dining at the finest restaurants and even a romantic sailboat ride, not many people will let these offers go to waste. The amount of success Groupon has achieved has lead to many start-up companies and competitors that Groupon must fend off to maintain its grip for daily-deal supremacy.
According to Sherman, last year Groupon grossed $760 million and reports indicate they are expecting to receive $25 billion in Initial Public Offering (IPO) for 2011. Groupon has created the blueprint, new trend that has gotten companies developing ways to imitate Groupon in an attempt to get a piece of the profits. According to Preddy, companies such as The New York Times, Facebook, and Groupon’s main competitor LivingSocial are trying to incorporate the idea of group buying that has made Groupon the company investors are proclaiming to be the next big thing.
With so many new companies entering the daily-deal market, it is reminding many experts of the dot-com bubble that burst in the early 2000’s. With so many companies bidding for a place in the daily deal market, it has resembled the environment of the dot-com industry. One of the major factors that could play a role in the downturn or the daily deal market is the amount of competition in the industry. The results of so many daily deal companies trying to cut deals with local companies will be in the favor of the local companies.
This will allow local companies to demand a bigger percentage of the profits that the deal will produce. This will slow down the growth of most companies and eliminate many others (Sherman, 2011). Another factor that could play a huge role in the downturn of the industry would be customer fatigue. The whole purpose of consumers visiting these daily deal sites is to receive a discount on services and goods (Sherman, 2011). With numerous daily deal sites being created; customers will have the option to shop around to find the better deal.
In addition, many companies might have the same offers that are posted on other competitors’ sites, making it hard for many customers to pledge loyalty to just one company. This will be limiting the growth of companies because customers’ cannot find uniqueness in the companies that occupy the industry. These are all negative outcomes that could possibly happen, but as of now, the daily deal industry looks bright. Coupons have been around for a very long time and are not going away for a very long time, especially due to the economy.
In fact, digital coupons were up 41% and paper coupons were also up to an all time high in 2010 (Preddy, 2011). Therefore, since we are in the technology age, electronic coupons will become more of the norm and if the economy stays in the state that it is now more and more people will continue to look for deals. It is also a great way for companies to build a customer base. By offering their services or goods through a daily deal site, they may receive repeat visitors to their businesses, if they are satisfied with their services. Groupon has created a new dimension to the daily deal industry.
Their innovative way of delivering discount services to their customers has become the new trend and has made them the face of their industry. Like in the dot-com era, many clones were created to try to grab a piece of the profits that were being generated. Not all of the companies disappeared, so to maintain the dominance that they have in this industry, Groupon must perfect their core competency by approaching it with the same innovative mindset that got them in their current position. Section 4 – Technology Sourcing and Internal Innovation
The “Daily Deal” approach is Groupon’s way of being innovative by combining social networking and the trend of promoting local businesses. The deals are sent to Groupon members who decide if they want to buy the deal or not. There are a specified number of people that have to buy the deal by pushing the “Buy” button in order to reach the reserve amount in a twenty-four hour period. Once the reserve is met, the tipping point has been reached and the proverbial deal is on. Facebook, Twitter, and other venues are how Groupon members spread the word about deals being offered and using those offers to their advantage.
Andrew Mason, CEO of Groupon, started the company after running another social networking website called The Point. As explained by Mason, “at the Point, there was both fundraising and group buying” (Holden, 2010). The idea was to get eighty percent of the customers to subscribe to an offer such as CIO magazine and the subscribers would all get fifty percent off the subscription. The deals worked well enough that Mason decided to move them to Groupon. The first offering on Groupon was a deal for two pizzas for the price of one at a restaurant located in the same building where Groupon is headquartered.
Groupon features both large and small businesses on their site. Spas, bakeries, salons, and restaurants are the most popular businesses that are patronized. In some cases, Groupon is approached by businesses in order to generate additional sales and in other cases, suggestions are made by employees. “We do our best to identify the best businesses in the city, based on reviews,” explains Mason (Holden, 2010). Afterwards, a phone called is placed to an organization and they are asked if they would like to be featured on the web site.
Groupon verifies that the organizations are legitimate and often sample an organizations products and services themselves. Mason has focused on local commerce because it is his belief that so many of the things that customers buy and/or spend money on are social activities like going to the movies. Groupon has sourced technologies such as Facebook and Twitter in an effort for members to forward the daily emails or mention that day’s offer in their online postings, updates, and tweets. Often times, the daily deals are spoken of in water cooler conversations in the workplace. The integration of social networking with ecommerce is part of a new trend called “social commerce,” explains Mason (Holden, 2010). For Mason, creating humorous deals and descriptions related to offers is one of the most enjoyable aspects of running Groupon. In January of 2011, Mads Faurholt-Jorgensen announced that Groupon revealed their intent to enter the Chinese E-commerce market. Groupon was reported to have sent an email detailing their intentions of seeking new talent and their plans to increase the number of Chinese employees to one thousand in a ninety day period.
This announcement was on the cusp of Groupon meeting with various Chinese group discount shopping websites which included companies like Lashou. com, Ftuan. com, and Meituan. com in Shanghai. No agreements have come from these negotiations and it is reported that China maybe Groupons trickiest market to enter. Groupon may encounter problems trying to secure deals for users in the local Chinese dining, travel, and retail operations. In another innovative move on the part of Groupon, they plan to unveil a mobile application tool that it hopes will alter the way eating, shopping, and playing is done by everyone.
Set to release in April of 2011, the daily Groupon deals will be adding the time and location of specific deals within the Groupon Now application. “I’m hungry” and “I’m bored” will be the two buttons presented to the user when he or she opens the application on their smartphone. Depending on the time and location of the mobile user, a wide range of choices will be presented which is intended to better the business for small and medium enterprises that accommodate various amounts of traffic during different times of the day and week.
Groupon Now is Groupon’s internal innovation of an existing product to match supply and demand which in turn, will benefit consumers and businesses. The existing Groupon 1. 0, which it is affectionately known, is predicated on the model of “have coupon will use,” in which consumers locate a business or deal they find interesting and buy the discount to use at a later time. Merchants did not have control of incoming patrons and customers went to a restaurant only because they had a coupon. Traffic in these locations went from hectic and chaotic on the weekends to empty tables and bar stools during the middle of the week.
Groupon Now is based in real time where offers are current and available at that moment to the consumer, based on their geographic location. Now, businesses can choose when their offers will be made available in an effort to better manage inventory and keep profits high. As an example, if there is a major convention taking place, vendors can time their offers at various locations in order to make the most profit. “With this kind of marketing, the possibilities are virtually endless and, owners and merchants can earn the highest return through careful planning, stocking, and management” (Ambani, 2011).
Section 5 – Product Development Strategy New product development is essential to the growth of an organization. You will limit your growth opportunities if you do not continue to innovate and develop new products for consumers to purchase. Groupon has been able to grow at an accelerated pace by sticking to their core competencies, while expanding their product offerings available to customers. This has allowed them to maintain the same “feel” of the website while continuing to expand upon existing revenue streams. Groupon has maintained the same philosophy in web product development since its inception in 2007.
The company first looks to get “the simplest thing that could possibly work out into the hands of our customers (MacManus 2010). ” Then they gather feedback and do short iterations. This product development philosophy reinforces Groupon’s core product principle: simplicity. Since the interface is simple for the end user, they resist adding features unless they are going to add value to the user experience. This allows product development the pportunity to work on innovation, rather than manintaining an over complicated user interface.
Groupon is also a big believer in small, cross-functional teams. According to Ken Pelletier, Groupon’s CTO since it’s inception in 2007 “We believe in bringing small teams of people together with a focus on a part of the product, so that there’s a certain amount of ownership. We try to hire people who’ve got a range of experience and backgrounds but we do lump engineers and designers and UX and QA and product managers together working elbow-to-elbow pushing out new products week-by-week (MacManus 2010). In July of 2010, Groupon launched personalized deals a service that allows the service to customize deals and feature specific coupons to customers based on their buying habits, location and other demographics. Each subscriber’s deals will become more relevant over time with increased information available about the customers. This allowed them to expand the number of deals they offer in each market without compromising the relevancy of each deal. “Interest in Groupon is so high we can only feature one out of eight businesses that contact us,” Mason said. Personalized Deals opens Groupon up to more merchants, who until now have been forced to look elsewhere to find new customers (Mossler 2010). ” Groupon is launching a new mobile deals service next month called “Groupon Now. ” The idea is for users to be able to click two buttons — “I’m Hungry” or “I’m Bored” — and get a deal for a restaurant or service nearby that is valid RIGHT NOW, but might only last for a few hours. This is a major evolution in product development for Groupon. For merchants, it’s a chance to fill empty tables or bring in customers during historically slow times.
For users, it’s a chance to get more deals, with the added convenience of location (Frommer 2011). Section 6 – Strategy to Protect Innovations Groupon is the pioneer of the coupon, daily deal industry. Groupon has over 70 million customers worldwide, and because of this success, they have been facing clone sites. To protect its intellectual properties, Groupon has filed for a patent on its group-buying model. Their patent is pending and while this process is under way, competitors are taking the risk of using Groupon’s model.
A patent is the property rights of a process, machine, manufactured item or variety of plant that must be useful, novel, and not obvious (Schilling, 2008). Also according to Schilling, other qualifications are reviewed when a patent is seeking approval. Those qualifications state that the item in question cannot simply change the material, size, element, shape, or portability of an already patent device or process. The process in which Groupon is getting its customers discounted prices from local businesses through a website is useful and is not an already patent idea.
Since their model has not been patented it has passes all of the other qualifications. Therefore, the question only question that is left is was this process common knowledge. There are two sides to this question. One side is that Groupon was the first to put the group-buy model online and have success with it. The logic behind this argument is that if this model were common knowledge, someone would have developed it a long time ago. The other side of the argument states that Groupon model is not an original idea.
I believe Groupon was innovative to put this model online, but they received their idea from deal brokering. According to Skoler, deal brokering has the same basis as the model incorporated by Groupon delivers to their customers. The idea of deal brokering is when a sales man uses their contacts to negotiate deals with local businesses to offer a one-time only big discount to attract new customers. The only difference is that Groupon took the idea more global and used technology such as email and text messaging to make it more fficient. Since Groupon’s model is not an original idea, I believe that the patent that is pending will be approved. Others with knowledge of the situation also believe that this idea is common knowledge and is entering the industry not fearing that Groupon’s pending patent will be acknowledged. Thus, the ease to get into this industry is relatively easy, but that does not mean that everyone will be successful. The only way Groupon can stay successful in this very competitive environment is to distinguish themselves from the crowd.
In an attempt to fend off competitors, Groupon is experimenting with a new technology that will separate them from the crowd of new comers. This technology is being referred to as Groupon Now. It is smart phone app that will use ask the user what they want to do and will offer real-time deals close to their location (Egan, 2011). For example, if a local bowling alley usual has a slow period on Tuesdays from 10am – 4pm they might give a discounted price to Groupon. The information from the offer is transferred to the app and will give the user the option of “Are you bored? . The Groupon Now technology will be an effective way for Groupon to maintain their position at the top of its industry. More importantly, this new technology has the likelihood of being a critical patent that Groupon needs to give them an incredible lead over the competition. Groupon Now will only be a building block in building a bigger barrier to stop new comers into the market. Especially with firms with unlimited amounts of funds like Google and Facebook looking to enter the industry, Groupon must stay innovative. Conclusion
In conclusion, Groupon timely entry into the daily-deal market has been their greatest advantage over the firms that has imitated their model. The amount of business that Groupon generates for local business has developed a reputation for Groupon that gives them the ability to negotiate more exclusive deals more than many of the clones in the industry. Also, Groupon’s unprecedented success has given them the resources to develop innovative technology and methods to separate themselves even further from the competition. The installed base Groupon has established is one of its greatest assets.
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