What You Need To Learn From Groupon’s Unprofitable Business Model

What You Need To Learn From Groupon’s Unprofitable Business Model

George Roberts, OpenView Venture Partners | Mar. 21, 2013, 5:36 PM | 1,587 | 4

A little more than two years ago, Groupon was the apple of the startup community’s eye. It had turned down a $6 billion acquisition offer from Google and was headed for a remarkable IPO. Today, no one really knows what Groupon’s future holds. But it doesn’t look good.

Since its IPO in November of 2011 (the largest by a U.S. Internet company since Google raised $1.7 billion in 2004), the company’s stock has plummeted. After debuting at $20, Groupon’s stock can now be had for less than $6 a share. Adding insult to injury, Groupon’s market cap is now almost $2.5 billion less than Google’s original offer.

Now, to be fair, Groupon’s current stock price of around $5.38 is more than double what it was in November when it hit rock bottom. But I’m guessing that nice gain doesn’t quite make up for the billions that investors have watched fly out the window in the last year.

Where Did Groupon Go So Wrong?

When it comes to entrepreneur leadership lessons (which is the theme of this series of posts), the company’s management team — including its much-maligned former CEO, Andrew Mason — forgot that building a sustainable business is a marathon, not a sprint.

Ultimately, that led to a series of bad decisions, many of which Fast Company’s Noah Fleming does a great job of highlighting in a post from last October. But the business’s most damning mistake was its disproportionate focus on new customer acquisition, often at the expense of customer retention.

Groupon was obsessed with growing as fast and as big as it possibly could, which resulted in high churn and, as Slate’s Farhad Manjoo points out, a business model that is just about anything but profitable.

Yes, new customer acquisition is critical to taking a business from the startup phase and growing it into a big, publicly traded corporation. But that big corporation you become will simply be a house of cards if you’ve failed to pair short-term growth initiatives with long-term strategic vision.

Oh, and you certainly can’t mistreat, abuse, or ignore your existing customers to the point that very few of them hang around beyond their first use with your product or service. Doing that simply leads (in a best case scenario) to treading water.

Why You Should Care About Groupon’s Demise

Groupon isn’t the only technology company that’s experienced incredible short-term success, only to flame out as it scales. The number of companies on that list is far too long to share here.

But here is the lesson that entrepreneurs and CEOs can learn from Groupon: Resist the temptation to chase short-term success at the expense of long-term sustainability.

I recognize that in the startup and expansion-stage world, it almost always seems like there are new monthly quotas to hit or quarterly objectives to achieve. But at the end of those months or quarters, where does short-term success get you? Ultimately, there is always going to be another month, quarter, or year. And if you haven’t spent any time focusing on your long-term health while you’ve executed short-term growth initiatives, you will eventually run face first into a brick wall.

Just ask Groupon, Andrew Mason, and anyone that’s invested in the daily deals business.