Adapted from “Groupon\'s Boston Problem: Copycats” By Shayndi Raice and Stu Woo

Question

Adapted from “Groupon's Boston Problem: Copycats” By Shayndi Raice and Stu Woo 8 July 2011 The Wall Street Journal. Use both industry and firm level analysis tools/frameworks to explain if Groupon’s sources of competitive advantage was temporary or sustainable.

Stephanie Clarkson, a 40-year-old resident of the Boston suburb of Quincy, Mass., used to use daily-deal site Groupon Inc. religiously. But not any more. As the number of active daily-deal sites in the Boston area more than tripled over the past two years, Ms. Clarkson started checking out competing sites. Now she monitors 32 of them -- including LivingSocial Inc., Eversave and Opentable Inc. -- for deals on everything from Boston's tapas bars to health clubs…Now, as Groupon prepares to go public, the e-commerce company's experience in Boston with consumers like Ms. Clarkson illustrates the challenges it has begun to experience nationwide.

Groupon touts Boston as one of its biggest and most successful markets. The Chicago-based company emails offers to subscribers, typically selling vouchers for 50% or more off the listed prices of goods and services at local businesses. Then it usually pockets half of the voucher's sale price. But as Groupon clones have proliferated -- from nine active daily-deal sites serving Boston two years ago to 33 today, according to daily deal-site aggregator Yipit -- the loyalty to Groupon of both consumers and merchants offering online deals has eroded.

In its regulatory filings, Groupon said its subscriber base and revenue in Boston have both jumped substantially since the 2009 second quarter, increasing from a subscriber base of 17,000 people and revenue of $700,000 to 800,000 subscribers and $9.3 million in revenue in the first quarter of 2011. But that growth has already slowed. According to Yipit, the average number of Groupons purchased by a customer in Boston has dropped from 1.9 to 1.7, though the company says the decline is only 1.5 to 1.4. Meanwhile, Groupon's revenue per subscriber in Boston has dropped to about $15 in the 2011 first quarter from about $20 in the 2010 second quarter.

Groupon remains the leader in the Boston market, with revenue of $3.1 million in May. Its closest competitor, LivingSocial, generated about $745,000 in revenue there in the same time period, according to Yipit. Still, rival sites are gloating. "We've seen our introduction really change the quality and number of deals listing with Groupon" in Boston, said Seth Priebastch, CEO of SCVNGR's LevelUp, a deal service that entered the Boston market in March…Nationwide, Groupon's cut of the daily deals market has also dropped. Its share in the top 30 metro markets fell to 48% in May from 52% in April, while LivingSocial expanded its share to 24% from 20% in the same period, according to Yipit.

Groupon first entered Boston in April 2009, its second market after its hometown of Chicago. But within weeks, Groupon ran into competition. Eversave was launching in Boston at the same time, BuyWithMe quickly followed in May, and LivingSocial wasn't far behind, entering Boston in the fall of 2009. Ever since, the competition has continued to pour in.

Some Boston rivals quickly began trying to take market share from Groupon by telling merchants offering online deals that they would take a smaller commission than the 50% Groupon typically seeks. Others such as LevelUp, don't take a commission from merchants at all unless customers return and the business offers better deals to customers every time they return. As a result, Groupon has had to increasingly compete for merchants. Brunello Bistro, an Italian restaurant in the Boston suburb of Somerville, Mass., has run successful offers with Groupon but now runs deals with so many sites that Fernanda Nogueira, who handles the restaurant's marketing, said she can't even remember them all. Ms. Noguiera said she likes working with rival daily-deals site BuyWithMe, partly because BuyWithMe takes 40% of a voucher's value, compared with Groupon's 50% cut. But she added that the eatery tries to work with numerous daily-deal sites "just to see how it's going to be." Others it has tried include EverSave, kgbdeals, OpenTable, HomeRun and CoupMe…

Explanation / Answer

Groupon is an e-commerce market place that connects its subscribers with various merchants. The subscribers get attractive discounts.

Now competitive advantage, as per Porter, helps a firm to earn above average profits in the long run on a sustainable basis. There are two basic types of competitive advantage that an organization can have - low cost or differentiation. When Groupon started its business, its business model was unique and different. It targeted a latent demand and requirement of its target customers. It used the advantage of differentiation to target a broad set of consumers and users.

Now, the competitive advantage was not sustainable, rather it was temporary. This is due to the fact that the business model being followed by the company is easily replicable. Once Groupon was a success, several competitors sprang up providing the same type of offerings and services. Further the competing firms charged less from the merchants as commission, when compared to Groupon's charge of 50%.

Groupon had gained competitive advantage also by exploiting economies of networking i.e. by letting consumers buy products as a group. The larger is the network, the larger is the discount. Now, this is also easily replicable and competing firms were able to easily establish their own large networks.

The framework that i have used is the one developed by Michael Porter. As per Porter's framework, competitive advantage can be sustainable only if the business model and processes are hard to copy.

Another framework called the value cycle can be used. Groupon created value by offering something that met the needs of the customers. However, the organization failed to capture value. Value is captured only when the price of a product exceeds its cost. The company loses money on every single transaction as the payment received from customers is less than the cost incurred by the company. Lastly Groupon has failed to renew value as well. Value is renewed when a company adapts a new technology or changes the needs of the customers. Groupon has not been able to do that.

Thus using the (i) framework of Porter and the (ii) framework of value cycle, it can be said the Groupon's competitive advantage is not sustainable. Rather, it is temporary.

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