Couponing: Good Deal or Flawed Business Model?

Couponing: Good Deal or Flawed Business Model?

When Groupon issued its massive IPO in July 2011, the company was in a difficult position. After a reissued S-1 -- a testament to the company's inexperience -- the rapid emergence of competitors, and customer deal fatigue (translation: exasperation at the number of emails they received), Groupon was in a distressed position. The stock dropped 67% in just over a year and a half. However, given these new price lows, has the time come to reconsider this company as an investment choice?

Time to reconsider
When Groupon first began, it had a small amount of merchants and customers in each market. The company's strategy was to acquire email addresses and forward local deals to subscribers. Now that the company has grown to over 200 million subscribers and 42 million active customers, the company is in the process of changing its fundamental marketing strategy to one of customer personalization.

As a result, Groupon's reported billing growth dropped by over 500 basis points from 2012-2013. In addition, the company's marketing expenses as a percentage of gross billing, which was, at one point, nearly 29%, has since dropped to 3.5% -- a clear indication that the company is no longer focused on rapid customer acquisition.

Groupon is also making an effort to transform its business into a more mobile-driven one, which further demonstrates that it's focused on moving beyond email and into search. The number of Groupon's active deals also increased to an average of 40,000 by March 2013 (up from 1,000 at the time of the IPO) in North America. Groupon is arguably one of the most mobile-saturated e-commerce companies today, boasting 45% of North American transactions coming from mobile. This represents a 15% increase from 2012.

I am not advising you to rush out and buy Groupon; rather, add it to your watchlist. A key point is whether or not Groupon will be able to convert its 200 million subscribers into active customers. It will take several quarters of earnings to determine if this is possible.

Groupon: the next OpenTable?
A company that deserves discussion in relation to Groupon is OpenTable . This San Francisco-based company, which makes real-time restaurant reservations for customers, profits by charging restaurants both monthly and per-reservation fees. In 2010, OpenTable had a daily deals segment called "Spotlight," but the company scrapped it by late November of 2011 as the result of disappointing sales (2% of sales during the third quarter of 2011, or less than $6 million.)

Here's where it all gets interesting: very recently, Groupon announced that it would be entering into the premium restaurant reservation business with the launch of "Groupon Reserve." Reserve combines restaurant deals, the hallmark of Groupon's core business, with online instant reservations. While it sounds like Groupon is making strides to encroach on OpenTable's territory and will probably take some share of the reservation revenues, the amount isn't likely to be large enough to be of concern to OpenTable.

For now it should be noted that OpenTable's decision to scrap Spotlight does not weigh negatively on my opinion on Groupon, and that Groupon is not going to become a restaurant reservation company - it's most likely using reservations as an added incentive to convert more subscribers into active users or to acquire new subscribers.

Travelzoo's deals

Outside of daily deals (in the form of goods and services) and restaurant reservations, there's a whole other category not yet discussed - travel deals. Travelzoo , a global Internet & media company with a subscriber base of 26 million, launched a "Local Deals" service in August of 2010. The service enables customers to buy Groupon-esque coupons for local businesses. Travelzoo has the advantage of packaging local deals with placements in its core product, the Top 20, a weekly newsletter highlighting the best 20 vacation deals of the week. This will in turn drive higher Local Deal revenues.

In addition, Supersearch and, Travelzoo's two search engines that direct people to travel-booking websites, can benefit from Local Deals in several ways. There is an element of the deal business in general that is about discovery, and this is crucial to the company's long-term growth - as people get more comfortable with the idea of couponing, they will also look to the company as a source of discovery.

While the Local Deals arm of Travelzoo's core business is not a primary driver to the company's success story, the discount and coupon business is a potentially additive advantage to revenue growth. This further supports my positive view of the Groupon story - that the couponing business deserves a more positive evaluation than it has been given in the past year.

Conclusion: Sustainability is key

While it's too early to buy any significant amount of Groupon stock, it is worth reevaluating as a potential profitable long-term investment based on what the company has been doing recently. Groupon has shown that, while young, it is adaptable; it has a large user base and a growing international geographical footprint, and is gaining traction in mobile.

The couponing world is unproven, and only time will tell if it is sustainable. However early signs indicate that Groupon might have tapped into something extraordinary with its enormous customer and merchant reach.

The article Couponing: Good Deal or Flawed Business Model? originally appeared on

Colin Tweel has no position in any stocks mentioned. The Motley Fool recommends OpenTable. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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