Too easy.

Photographer: Michael Nagle/Bloomberg

Groupon's Once-Bright Star Burns Out

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Groupon Inc. is buying LivingSocial Inc., merging the two “daily deal” titans into one business. It is a measure of the size of these titans that, as TechCrunch writes, “The LivingSocial deal, which is expected to close in November 2016, is ‘not material’ to Groupon’s earnings, meaning it is small enough that Groupon does not have to disclose the price.”

Groupon itself has fallen considerably from its high-flying days as the New New Thing in tech stocks. It went public at $28 a share. It is now trading at around $4. Its net income hovers around 0 percent, and the company announced further retrenchment around the same time it announced the LivingSocial merger.

What happened? The short answer: Its business model was never very good.

Coupons can basically serve two functions: price discrimination or advertising. Price discrimination is when you charge different customers different prices based on their willingness to spend money. Supermarket coupons are great for this: People who are price-sensitive enough to spend their Sunday morning combing through the coupons and clipping them out get a discount, and the people who value their time more than their money pay full freight.

Coupon shows make a lot out of the extreme folks who manage to go to the grocery store and pay nothing for a huge cart of groceries, but if you watch those shows, you’ll see those people have to go to extreme lengths just to get enough coupons to pull this off -- badgering friends to collect their inserts, diving into dumpsters to get discarded newspapers -- and then find storage space for 30 bottles of shampoo. Most people, even couponers, won’t bother.

Coupons can also be a sort of advertising to new customers. Think of those coupon booklets they used to give college students, or those sent to people who’d just bought a house. Those folks don’t know the local restaurants, hair salons or pest-control companies yet; a coupon essentially earns you the right to compete for them as loyal customers.

Groupon was a little bit of both. But it didn’t do either very well.

Groupon isn’t good for price discrimination because it’s not enough bother. It’s really a hassle to clip out coupons, file them all away, then alter your shopping list accordingly; it’s not a hassle to buy a Groupon for a restaurant. It’s about as easy as ordering anything else online.

Groupon certainly did give companies the chance to compete for new business. But that new business, as far as I could tell, was young and, more important, cheap. Restaurateurs complained that folks showed up, spent exactly the amount on the Groupon, and never came back; they went to whatever spot was offering a new Groupon. Salons complained they were chintzy with tips. Many places ended up losing money, especially after the flood of new customers overwhelmed the staff and alienated the existing patrons who were actually spending real money.

Getting goods below cost is, of course, a very attractive prospect for the customer. But coupons are a two-sided business; you also need businesses willing to offer those sweet, sweet deals. There are some businesses for which the Groupon model works really well -- a hotel room or a spot on a booze cruise is essentially a wasting asset, with a value that rapidly goes to zero as soon as the day wanes without filling the room or the boat departs the dock. Filling those slots even at a trivial price is often better for the business than not filling them.

But for businesses that have a significant marginal cost, such as restaurants or salons, the value of Groupon deals is considerably more dubious. And that showed up in the daily deals. As businesses understood the economics better, the deals got considerably less sweet, and customers got less interested in buying them. Meanwhile, other competitors entered the market, making the arithmetic even grimmer for daily-deals sites.

This was obvious as early as 2011, when I was bearish on Groupon’s future. That bearishness seems to have been thoroughly justified.

It’s always fun to revisit such predictions -- as long as you got them right. But we should also probably revisit similar predictions I got wrong, such as Facebook and Google, both of which also seemed overvalued to me. Oops. That’s the peril of tech: As William Goldman once wrote of Hollywood, “No one knows anything.” New business models come up, they’re tried, and sometimes they’re spectacular. And then sometimes no one wants your product -- at least, not at any price that will make it profitable. The only way to find out is to pay your money and take your chances.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net