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Groupon Decisions

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GROUPON: DECISIONS! DECISIONS! DECISIONS!

Groupon, an Internet coupon company, was founded in Chicago in November 2008 by Andrew Mason, a young entrepreneur who was working with $1 million in seed money provided by Internet entrepreneur Eric Lefkovsky, who was Mason’s former boss.1 Groupon’s business innovation is merging collective buying with coupons⎯hence the company’s name: group plus coupon.2 According to Mason, the strategic goal of Groupon is to “fundamentally change the way that people buy from local businesses in the same way that e-commerce has changed the way that people buy products.”3 How does Groupon benefit from changing the way people buy from local merchants? The answer: Groupon collects “half of actual sales, not just profits, in exchange for the introduction to a new customer.”4

The Groupon business model is based on “[c]onsumers sign[ing] up to receive offers from local firms by e-mail each day, ranging from restaurant meals to pole-dancing lessons, at discounts of up to 90%. But Groupon made virtual coupon-clipping exciting by, first, having offers expire after just a few hours and, second, cancelling them if they do not attract a minimum number of buyers (the ‘group’ in Groupon).”5 “A certain number of people need to buy into any given deal before it kicks in, or ‘tips’ in Groupon parlance. Once the deal tips⎯for example, 200 people have purchased a $40 coupon for an $80 massage⎯the merchant and Groupon split the revenue roughly 50/50, and a group of customers has an unbeatable bargain.”6 Given that a minimum number of people need to buy into a coupon deal before it ‘tips,’ buyers eagerly spread information among family and friends, which in turn increases the number of buyers.7 This effect is like a snowball rolling rapidly down a steep hill⎯and it can benefit both Groupon and the merchants, at least in the short-term.

Since its inception in November 2008, Groupon has grown like wildfire. Just two years later Groupon was operating in 150 markets in the United States and 100 markets in Europe, with approximately 35 million registered users.8 Then by early June 2011 Groupon reported having 83 million subscribers in 43 countries,9 including an entry to China in March 2011.10

Groupon securely dominates the online coupon market in Chicago, New York, and San Francisco, “where its offers are unique and lure consumers into new neighbourhoods and experiences, … [t]hat’s less true in second- and third-tier cities …where Groupon relies on merchants to come to it.”11 Although Groupon is the dominant player in online coupons, “its brand only takes it as far as it offers the best deals from the most sought-after local retailers, restaurants and services⎯the kind of businesses that used to reside in the Yellow Pages and $10 coupon books.”12

A major challenge for Groupon in pursuit of its strategic goal is to retain the merchants beyond the first coupon deal with them. Early reports indicated that as many as one-half of small businesses did not continue to participate in Groupon deals, and that the majority of those ceased to participate because the first deal was unprofitable.13 In attempting to counter this merchant drop-off effect, Groupon hired a customer relationship management agency to track merchant satisfaction; “Groupon says early surveys have shown 95% of businesses say they want to work with the company again.”14

Groupon’s success has attracted much attention among the Internet business community. Indeed, in late 2010 Google made a $6 billion buyout offer to Groupon⎯a sum that was nearly twice as much as Google had previously offered for any acquisition.15 Mason, however, rejected the buyout offer⎯a decision that one observer characterized as “frustrating, maddening and inexplicable to most people.”16 Impressed by Groupon’s meteoric rise, venture capitalists say that Google’s interest in acquiring Groupon is easily explained and understood.17 “Given the potential for future profitable growth, $6 billion may be just fraction of its ultimate value in the market.”18 Who wouldn’t want to own a money machine like Groupon?

Then in early June 2011, Groupon filed paperwork with the United States’ Securities and Exchange Commission (SEC) for an Initial Public Offering (IPO) of stock, with the objective of raising $750 million.19 Speculation in the days following the IPO filing indicated that the amount of money Groupon could raise might be significantly more than $750 million. Indeed, one observer suggested that Groupon “may leapfrog Google Inc. as the biggest U.S. Internet-related initial public offering ever.”20 Another reporter said, “Groupon has every incentive to IPO fast, to cash in while its expansion is in overdrive. But investors should take their time assessing whether the company’s explosive growth really will translate to surging profits.”21 Additionally, The Economist points out that “Groupon’s position is not as unassailable as it appears from its rapid growth and huge market share⎯more than 60% in America… . To ward off competition … Groupon will be forced to lower the share of revenue it keeps from its deals.”22 Moreover, an increasingly large chunk of Groupon’s revenue goes to cover marketing costs associated with acquiring new subscribers.23

Steve Rosenbush, writing in the Institutional Investor, asserts that “Groupon is still in the early stages of its growth … [and] has yet to tap the entire U.S. market, let alone the international market.24 However, analysts disagree about the future of the online coupon market, with some believing it has monopoly potential and others believing that there will be multiple players with multiple product variations.25 Evidence is mounting that the latter view may be more on target. Groupon may become strangled by its own success and exponential growth rate. As indicated by its founder and CEO, Andrew Mason, “Groupon’s inability to handle the businesses banging on its door … has led to the proliferation of clones.”26 Mason “estimates that there are some 500 [clones]; many have ripped off Groupon down to the company’s bright green signature colour and website layout. But only Living Social, which just received a $175 million investment from Amazon, has emerged as a genuine competitor. Groupon still maintains about 80% market share. Losing to a competitor, perhaps one that doesn’t exist yet, is one way the company could fall.”27 In a March 2011 statement, Mason opined, “[b]y this time next year, we will either be on our way to becoming one of the great technology brands … or a cool idea by people who were out-executed and out-innovated by others.”28

With this mixed evidence, are Groupon’s business prospects rosy or dismal?

Notes
1. S. Rosenbush, “Groupon’s Andre Mason: Not So Crazy,” Institutional Investor (December 2010).
2. B. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15.
3. B. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15.
4. A. Kessler, “Easy Money and the IPO Boom,” The Wall Street Journal (Eastern edition) (May 27, 2011): A15.
5. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.
6. B. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15.
7. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.
8. S. Rosenbush, “Groupon’s Andre Mason: Not So Crazy,” Institutional Investor (December 2010).
9. B. Bosker, “Groupon Files for IPO,” The Huffington Post Web site (June 2, 2011), http://www.huffingtonpost.com/2011/06/02/groupon-files-for-ipo_n_870473.html (accessed July 9, 2011).
10. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.
11. M. McCullough, “Groupon, Clones Face Unknowns,” Canadian Business 84(6) (April 11, 2011): 18.
12. M. McCullough, “Groupon, Clones Face Unknowns,” Canadian Business 84(6) (April 11, 2011): 18.
13. K. Patel, “GROUPON PRIMES ITSELF TO BECOME NEXT ZAPPOS; Ad Age Visits to See How this Smart Startup Aims to Keep 60 Million Global Consumers Feeling the Love,” Advertising Age 82(9) (February 28, 2011): 4.
14. K. Patel, “GROUPON PRIMES ITSELF TO BECOME NEXT ZAPPOS; Ad Age Visits to See How this Smart Startup Aims to Keep 60 Million Global Consumers Feeling the Love,” Advertising Age 82(9) (February 28, 2011): 4.
15. B. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15.
16. S. Rosenbush, “Groupon’s Andre Mason: Not So Crazy,” Institutional Investor (December 2010).
17. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.
18. S. Rosenbush, “Groupon’s Andre Mason: Not So Crazy,” Institutional Investor (December 2010).
19. A. Das and G.A. Fowler, “Groupon to Gauge Limits of IPO Mania,” The Wall Street Journal (Eastern edition) (June 3, 2011): A1.
20. S. Ovide, “Quarterly Markets Review: IPO Market: Bubble Talk Surfaces in Web IPS—Led by LinkedIn, Quarter Saw Questionable Valuations; Analysts Avoid B-word,” The Wall Street Journal (Eastern Edition) (July 1, 2011): C8.
21. R. Winkler, “Amid Euphoria, Beware Getting Caught by Groupthink on Groupon,” The Wall Street Journal (Eastern edition) (June 4, 2011): B18.
22. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.
23. R. Winkler, “Amid Euphoria, Beware Getting Caught by Groupthink on Groupon,” The Wall Street Journal (Eastern edition) (June 4, 2011): B18.
24. S. Rosenbush, “Groupon’s Andre Mason: Not So Crazy,” Institutional Investor (December 2010).
25. M. McCullough, “Groupon, Clones Face Unknowns,” Canadian Business 84(6) (April 11, 2011): 18.
26. B. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15. Chapter 10 Mini-Case: Groupon, p. 4, Copyright © 2014 Nelson Education Ltd.
27. Weiss, “The Weekend Interview with Andrew Mason: Groupon’s $6 Billion Gambler,” The Wall Street Journal (Eastern Edition) (December 18, 2010): A15.
28. Anonymous, “Business: Groupon Anxiety; Online-coupon Firms,” The Economist 398(8725) (March 19, 2011): 70.




Questions

1. When a company is deciding whether or not to partner with Groupon to bring in new customers, it is making a nonprogrammed decision.
a. True
b. False

2. Always looking for new ways to bring in business, Nazim chooses to try working with Groupon. His decision was based on a personal rule of thumb that if there is a hot trend using technology, he wants to be in on it, because it’s the young tech-savvy customers that he particularly wants to attract to his business. What does Nazim’s decision illustrate?
a. Satisficing
b. Use of a heuristic
c. Garbage can model
d. Escalation of commitment

3. Nazim’s business partner, Amos, tries to talk Nazim out of the deal with Groupon, Why? Amos knows little about Groupon, but has just learned that a friend’s business was scammed by an internet marketing company. He has decided any of these Internet-related marketing companies can’t be trusted. What is Amos illustrating?
a. Confirmation bias
b. Central tendency
c. Recency effect
d. Satisficing

4. Nazim’s first Groupon deal was unsuccessful. Not enough people signed up to “tip” the deal. He tried again, this time offering such a low deal that he attracted a lot of customers but lost money. Sure that the Groupon approach has to work, he tried a third, fourth, and fifth Groupon campaign, each time trying a bigger deal and ending up losing more money. What is Nazim demonstrating?
a. Halo effect
b. Confirmation bias
c. Normative decision model
d. Escalation of commitment

5. When Mason started Groupon, an unusual business with no guarantee of success, he was working with $1 million in seed money provided by Eric Lefkovsky. What characteristic was Lefkovsky demonstrating through this financial support?
a. Satisficing
b. Pure rationality
c. Low risk aversion
d. High confirmation bias

6. When Mason first came up with the idea for Groupon, what stage in the creativity process was he in?
a. Preparation
b. Incubation
c. Illumination
d. Verification

7. Research on the link between creativity and personality suggests that Mason’s creativity in coming up with the Groupon concept may be related to which of the following?
a. Self-confidence
b. Machiavellianism
c. External locus of control
d. Narrow range of interests

8. If Mason wants his employees to be highly creative, how can he support that in the organizational environment?
a. Isolate people so they can have the privacy to think
b. Emphasize the importance of following rules
c. Closely monitor employee work
d. Give autonomy

9. If Mason wants some employees to participate in decision making as a group but senses a hesitation in some to contribute, what decision making method would be suitable to ensure participation?
a. Quality circle
b. Brainstorming
c. Dialectical inquiry
d. Nominal group technique

10. If Mason has a diverse collection of employees from various cultures, which employees will likely be more comfortable participating in group decision making with him?
a. Those from a culture with high power distance
b. Those from a culture with low power distance

  • SubjectBusiness
  • TopicGeneral Business
  • Difficulty LevelCollege/University
  • Answer has attachmentsNo
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Lorraine Green
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