The Branding Challenges of Groupon: A "Sticky" Situation

A colleague, a senior official at a leading governmental IP body, said it best to me several years ago during a pleasant luncheon conversation. "Forget patents and copyright", he declared, "the ultimate source of long-term IP competitive advantage is the strength of the company's brand. At the end of the day, branding is where it is at." I took these thoughts to heart when, several years ago, I considered the Groupon phenomenon. Two years to the day (June 6, 2011), in light of the rejected multi-billion dollar acquisition offer by Google and on the cusp of the Groupon IPO, we opined ("The Groupon IPO: Where does IP fit in?"), here, that Groupon faced an uncertain future, despite all of the interest in the company.

Many of you will are probably familiar with Groupon, here, whose business model rests on signing up participating merchants and service purveyors to offer their goods and services on the basis of the deal-of-the-day, in the belief that the customer will then return for more at full price. Our thinking at the time in questioning the business model was that the company faced the prospect that its marketing and advertising costs would never reach the necessary economies of scale and that low barriers to entry made the prevalence of competitors likely. As a result, the company would find it difficult to develop a "sticky" brand, whereby a critical mass of customers would develop an ongoing affinity to the brand that would translate in customer loyalty.

In other words, in the absence of any other material source of IP right that might confer a competitive advantage, the company was left with the slender reed that it could develop sufficient goodwill and reputation to enable it to stand-out in what promised to be a crowded field. Based on what we saw, we were skeptical that the goodwill and reputation of the Groupon brand would ever achieve the kind of brand stickiness that is essential to its long-term business success. We maintain this position—Groupon made be widely covered as a media item, but it has failed to achieve the hoped-for degree of customer loyalty. If "branding is where it is at", Groupon faces a daunting uphill battle.

When I wrote these words, I did not take into account that there might also be material collateral damage to the company's partners, namely those numerous entities that provide the discounted offers that serve as the foundation for the company's activities. It turns out that not only has the company found it difficult to build the "sticky" brand necessary to create the requisite customer loyalty but, as suggested in a recent podcast rebroadcast of an interview heard on Bloomberg radio, the company's lack of success in creating a "sticky" brand may also have a deleterious affect on the company's business partners. The position expressed was that the discounted offers available through Groupon do not result in increased customer loyalty with the discounting entity. Rather, the customer is inclined to cherry-pick the offers, enjoy the discount and move on. No customer "stickiness" here.

But, from the branding point of view, that is not all. The opinion expressed in the podcast is that the participating company, by being associated with the Groupon offer, does not merely fail to increase its consumer custom: its participation in the Groupon program actually impairs the value of its brand. Not only does the participating company fail to increase its customer base materially but it creates a class of one-off customers who may have formed a negative view of the participating company. In the aggregate, therefore, not only has the Groupon business model been challenged to meet the challenge of my colleague's exhortation—"branding is where it is at"—but it threatens to inflict collateral branding damage to its business partners.

This conclusion must nevertheless be tempered by the recognition that it merely reflected the opinions of a single interviewee and no empirical evidence was brought to support the position. (Perhaps there is an eager graduate marketing student out there who wishes to take on the topic.) In any event, the Groupon tale does counsel companies engaged in business models that are largely bereft of other forms of IP protection to confront the remaining threshold IP questions—can I develop requisite brand loyalty and does my business plan affect the reputation of others?  From the point of view of the potential business partner in such a novel business plan, the question becomes—"have I sufficiently considered the implications to my company's name and brand?" The ultimate competitive advantage of both companies may rest in successfully providing a solution to these questions.

The Groupon IPO: Where Does IP Fit In?

No sooner had the successful LinkedIn IPO settled into becoming yesterday's news than the spectre of the even more massive projected Groupon IPO returned to the headlines. Groupon is the fabulously expanding online daily coupon company that features discounted gift certificates usable at local or national companies. Readers may remember that Groupon rejected last fall a reported acqusition offer by Google of more than $5 billion dollars, making the likelihood of an IPO only a matter of time. That time has apparently arrived, as Groupon has notified the SEC of its intention to float its shares.

The numbers for the projected Groupon IPO are eye-popping. The company seeks to raise amounts that I have heard range from $750 million upwards, the most ever in the social-media space, based on a valuation that has ranged in recent reports between $20 billion and $30 billion dollars. Groupon has been described as one of the fastest growing companies in history since its founding in Chicago 2008. In light of all of this hoopla, the article by Ari Levy, which appeared on 3 June on Bloomberg.com entitled "Groupon’s $540 Million in Losses May Leave Investors Leery of Share Sale" here, is noteworthy.

The gist of the reservation expressed by Bloomberg.com is that the fact that the company has had "operating losses of $540 million dollars in operating losses since 2008 may leave some investors leery of buying shares in a company with a business model so easy to copy that it has spawned 482 imitators.... Sales surged more than 14-fold to $644.7 million last quarter, making Chicago-based Groupon bigger than established technology companies like Citrix Systems Inc. (CTXS) and Autodesk Inc. (ADSK) Yet, with marketing costs rising faster than sales, Groupon may not make money fast enough to warrant the $25 billion valuation it was said to be contemplating. .... [This so so], despite that]gross profit, or the revenue left after sharing sales with merchants, jumped to $270 million in the first quarter from $20 million a year earlier."

Lets add a bit more granularity to these data. Groupon has increased its subscriber base to 83.1 for Q1 2011 (up to 3.4 million subscribers for the Q1 2010). The number of deals has increased from 1.8 million in Q1 2010 to 83.1 million for Q1 2011. The company provides coupon offers in more than 500 markets throughout the world, nearly in twice as many markets as its closest competitor.

With these kinds of numbers, what could be the concern? In a word, the problem is marketing costs. As reported in Bloomberg,"[t]o handle the growth, Groupon bolstered its workforce to 7,107 employees as of March 31, from 37 in June 2009. Revenue per sales representative in the first quarter was $172,000 a month, up from $87,000 two years earlier, the company said. The company had marketing costs of $208.2 million in the first quarter, resulting in a net operating loss of $117.1 million. Groupon spent $179.9 million on subscriber acquisitions, as it tries to build its lead ...."


And so to the question: can Groupon reach scabilility whereby profits will at some point consistently exceed marketing and manpower costs? This is especially so, given the low barriers to entry and fact that, while the service is online, the service is at the end of the day local. To reach profitability, Groupon has to ensure repeat custom. In the words of Espen Robak, president of Pluris Valuation Advisors LLC, a New York-based adviser to investment funds,“It all depends on how sticky those customer relationships are. 'If they become subscribers forever and you can harvest those relationships for a long time, the money you spent up front is money well spent.' ”

Notable in the discussion up to now is nary a mention of IP. Whatever success Groupon may enjoy, IP would seem to be a minor factor, at best. Let me suggest, however, that at least regarding trade marks/goodwill and trade secrets, IP considerations may be more crucial for Groupon than appear at first glance.

With respect to trade marks/goodwill, in a crowded field of competitors and low barriers to entry, the successful building of the Groupon brand may well be crucial to enable the company to continue to stand out from the rest of the pack. A killer brand may provide the ultimate leverage that will enable the company to achieve the kind of repeat custom that it needs to reach profitable scalability. The company's continuing marketing expenses suggests that it well recognizes the centrality of branding in determining its ultimate success.

Less certain is the value of trade secrets about the manner by which the company organizes and operates its business. I have no way of determining the extent to which the company's overall creative and operational "DNA" is a unique contributor to its current success. A direct measure of this will be attempts by competitors to poach current Groupon employees and the extent to which the company will then seek recourse in the courts to prevent such employees from disclosing valuable company trade secrets going to the heart of the company's operations. Even if such defections do not occur, the existence of such valuable trade secrets will presumably be expressed in the ability of the company to build its brand.

The claim is being increasingly made (including by myself) that the two pillars of IP that have driven entrepeneurship for 30 years--copyright (think software) and patents--will be of lesser importance in the social media space. If so, however, the upshot may not be that successful social companies will be bereft of IP, but that other forms of IP will become more central. Groupon may be an excellent test case to prove the correctness of this supposition.