Please answer the questions (1 to 6) for Case Study 2-1 (about Groupon)
For each question please write at least 5 sentences.
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■ CASE STUDY 2‐1 Groupon
Groupon, Inc. raised $700 million at its IPO in the fall of 2011, instantly providing a valuation of almost $13 billion for a company that was only three years old at the time. Some question the value, claiming Groupon has no sustainable compet- itive advantage. Others see Groupon as an innovative company with high potential.
Groupon sells Internet coupons for events, services, and other popular items that customers might want to buy. Customers sign up for daily e‐mails targeted to their local market. The daily deal, offered for one‐day only and only if a predetermined minimum number of customers buy it, gives customers 50% off the “retail” price. For example, a $100 three‐month health club membership would sell for $50 on Groupon. The customer pays $50 to Groupon and prints a certificate to redeem at the health club. Groupon keeps 50% of the revenue, or $25 in this case, and gives the rest to the health club. Effectively, retailers are offering 75% off with the customer saving 50% and Groupon taking the rest.
Groupon pays the retailer when the coupon is redeemed, making money both on the float between the time revenue is collected and the time the retailer is paid and on the certificates that are never redeemed at all, which the industry calls break- age. Retailers make money in the long run by introducing customers to their products, selling them additional products and services when they come in to redeem their coupons, and turning them into repeat customers. And retailers benefit from the buzz created when their business is on Groupon.
In August 2010, Groupon launched its first national deal, a coupon worth $50 of Gap apparel and accessories for $25. It sold over 440,000 coupons, netting Groupon and the Gap close to $11 million. But not all vendors are the size of the Gap, and smaller vendors have been overwhelmed with too many coupons. One local business owner said the company lost $8,000 on its Groupon promotion when too many coupons were issued. In fact, a study of 150 retailers showed that only 66% found their deals profitable.
Around the time of the IPO, analysts and observers alike claimed that Groupon’s business model was not sustainable. In addition to the large number of retailers who found their deals unprofitable, observers noted that Groupon does not produce anything of value, and it isn’t adding value to the retailers. Further, there are no barriers to entry to stop competitors. In May 2011, more than 450 competitors offering discounts and deals included LivingSocial, another daily deal site; restaurant.com, a site for restaurant gift certificates at a deep discount; and overstock.com and woot.com, sites offering discounted merchan- dise, not to mention deep‐pocketed competitors like Amazon.com.
But Groupon added to its business strategy with mobile capability and new services. In February 2012, it purchased Kima Labs, a mobile payment specialist, and Hyperpublic, a company that builds databases of local information. In May 2011, in a few cities, the company launched Groupon Now, a time‐based local application that gives customers instant deals at merchants nearby using location‐based software. CEO Andrew Mason told Wall Street analysts in February 2012 that he saw significant growth potential, including working on new features that will help customers personalize offers and avoid deals they don’t want.
- How does information technology help Groupon compete?
- Do you agree or disagree with the statement that “Groupon has no sustainable competitive advantage?” Please explain your point of view.
- How does Groupon add value to the companies whose offers are sold on the site?
- What impact, if any, will Groupon Now have on Groupon’s competitive position? Explain.
- What would you advise Groupon leaders to consider as their next application?
- Analyze the business model of Groupon using Porter’s five forces model.