{"id":1384,"date":"2015-10-04T23:42:55","date_gmt":"2015-10-05T03:42:55","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/groupon-will-weak-network-effects-be-its-downfall\/"},"modified":"2015-10-04T23:45:03","modified_gmt":"2015-10-05T03:45:03","slug":"groupon-will-weak-network-effects-be-its-downfall","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/groupon-will-weak-network-effects-be-its-downfall\/","title":{"rendered":"Groupon \u2013 Will Weak Network Effects Be Its Downfall?"},"content":{"rendered":"

In 2011, Groupon was believed to be “the next e-bay superstar\u201c and shortly after, its IPO had a market capitalization close to $16 billion\u00b9. In early 2015 it fell to $ 4.49 billion\u00b2 – the short term success flamed out quickly.<\/p>\n

The hype four years ago was a strong belief in the network effects Groupon could capture through which it would become a monopoly in an attractive market. This was a misconception that is reflected in the new, much lower evaluation today. But why are the network effects not keeping up to its promises?<\/p>\n

Business model<\/h4>\n

Groupon is a multi-sided platform connecting merchants with consumers. Merchants such as restaurants can offer special deals (e.g. 50% prize reduction) on Groupon\u00b4s website which consumers can then purchase. The value creation for the consumer is that they save money and might try out deals which they would not have consumed otherwise, whereas the merchants get advertisement. This might generate regular customers (being loyal without the deals) and make a little money off the customer as well. The money the merchants make is arguably very low as Groupon captures between 60-100% of the merchant\u00b4s deal.<\/p>\n

Indirect network effects without barriers to entry<\/h4>\n

Groupon has important indirect network effects: The more users that sign up to receive daily offers, the more attractive it becomes for merchants to offer their deals through it and vice versa. Groupon\u2019s biggest problem is that the cost of multi-homing (offering the deals on several platforms or purchasing deals at competitors\u00b4 platforms such as LivingSocial) are – for both sides – almost non-existent. This leads to extremely low barriers to entry into the market and competitors can easily contest for customer and business loyalty (in 2011, there were 33 different daily deal companies to choose from in the Boston area alone\u00b3).<\/p>\n

Absence of direct network effects<\/h4>\n

For instance, unlike Facebook, Groupon has arguably no direct network effects: The group character of most daily deals might help you acquire new customers. Nevertheless, the increase of other people buying the daily deals does not lead to a direct increase of value to the customer. You could even argue that is has a negative effect as the deals become more competitive and it is harder to schedule your deal after purchasing from your merchant. It is similar for supply-side of the market, which makes it difficult for Groupon to scale their business as they often have to cold-call their merchants individually.<\/p>\n

Overall,<\/h4>\n

Groupon has no strong network effects whatsoever. Yet, it had increasing revenues over the past several years (being profitable) and was much more successful than its second competitor, LivingSocial. This case shows that while it might be easy to implement similar business strategies, it is very hard to scale successfully as Groupon has done. So it is just a matter of time until Facebook or Google begin competing for market share and Groupon will have difficulty holding up against their resources and capabilities.<\/p>\n

 <\/p>\n

\u00b9http:\/\/dealbook.nytimes.com\/2011\/11\/04\/groupon-shares-spike-40-to-open-at-28\/<\/a><\/em><\/p>\n

\u00b2http:\/\/fortune.com\/2015\/01\/26\/lets-stop-laughing-at-groupon\/<\/a><\/em><\/p>\n

\u00b3S. Raice and S. Woo, \u201cGroupon\u2019s Boston Problem: Copycats,\u201d Wall Street Journal, July 8, 2011.<\/em><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Groupon is a multi-sided platform without the means of leveraging its network effects for market dominance, which in the end could kill their business.<\/p>\n","protected":false},"author":40,"featured_media":1385,"comment_status":"open","ping_status":"closed","template":"","categories":[592,453,389,591],"class_list":["post-1384","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-barriers-to-entry","category-groupon","category-indirect-network-effects","category-weak"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/competing-with-network-effects\/","yoast_head":"\nGroupon \u2013 Will Weak Network Effects Be Its Downfall? - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/groupon-will-weak-network-effects-be-its-downfall\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Groupon \u2013 Will Weak Network Effects Be Its Downfall? 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