Tuesday, June 7, 2011

Groupon, Competitive Advantage, Loyalty and Money

I just read a great blog on Forbes.com by Peter Cohan about Groupon ("Memo to SEC: Groupon Has No Competitive Advantage, Stop Its IPO") and why it should not be going public. Basically, the company is not capturing value because it has no competitive advantage. The article goes on from there. This blog has so many really basic business concepts contained in it that I urge anyone with a business, or who is starting a business, to read the blog - more than once. I promise this blog will not make your eyes glaze over.

According to Cohan (and I agree), Groupon is raging ahead on revenue, but is missing the mark on so many other business basics, such as capturing value.

1. Groupon's cost of revenue is too high. For every dollar it brings in, it's spending more than a dollar. No business can grow and prosper with such a business model.

2. Its costs are rising as it grows. That means it's not scaling properly. Costs should become a lower percentage of revenue as you grow. (Ever hear of economies of scale?)

3. The point of most marketing efforts is to generate loyalty. Groupon only rewards people for trying something they normally won't try by offering them a deep discount. That's rewarding trial - with no reinforcement for loyalty.

4. It has no competitive advantage - there are dozens of other daily deal companies out there all offering the same thing.

5. It's not reporting its financial picture properly or accurately. And it's slow in paying its vendors. (See the blog for the details.)

Read Cohan's blog. Study it. Click on the links. You'll gain a lot of wisdom about how not to run a business, which will save save you a lot of trouble as you plan, start or grow your own venture.  

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