Please ensure Javascript is enabled for purposes of website accessibility

Groupon's Evolving Business Strategy

By Luis Sanchez CFA – Updated Apr 14, 2019 at 1:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Groupon is phasing out the coupon vouchers that made it popular and taking on new initiatives to invest in the health of its marketplace.

Groupon (GRPN -3.63%) is an online platform that helps people find deals on local restaurants, goods, and services. The company became a popular fad in 2010 as people flocked to get discounts as deep as 80% at local businesses. This translated into eye-popping growth for the young company leading to its 2011 IPO. However, revenue growth turned into revenue decline shortly after the IPO as competition emerged and Groupon's popularity faded.

After several years of declining revenue, Groupon is attempting to turnaround its business by moving away from the heavily discounted coupon vouchers that made it famous toward a less discount-driven user experience that encourages more habitual use. Groupon is also investing in partnerships to increase the number of deals available on its platform. Will these changes stem Groupon's declining sales and keep the platform relevant?

Online Shopping

Image Source: Getty Images.

Moving away from discount vouchers

In an effort to improve its customer experience, Groupon is phasing out its voucher system. Historically, a Groupon user would pay for a deal up-front and then download a voucher that could be redeemed for a good or service. Recently, however, the company has introduced card-linked deals and booking requirements that allow for a more seamless user experience. By making Groupon easier to use, the company hopes that customers will use the platform more frequently.

The company introduced card-linked deals in 2018. This new way to use Groupon requires customers to link a credit card to their Groupon account to get cash back after they buy a good or service advertised on the platform. The cash back amount varies from smaller discounts of 5% to 10% to deep discounts of 40%+. Unlike Groupon's legacy voucher model, customers taking advantage of card-linked deals don't pay until the point of service and can use deals an unlimited number of times (as long as the deal is still active), but card-linked deals tend to carry smaller discounts than Groupon has typically featured.

Groupon has also made changes to its legacy voucher-based coupon product by requiring booking appointments for certain coupon categories. Booking appointments is in lieu of using a coupon voucher, which aims to create a more natural interaction between customers and businesses.

The bottom line is that Groupon has been tweaking its core products to enhance the customer experience and encourage more frequent use. Groupon is probably onto something because it has studied its customer behavior for years and has a good sense for what will improve the platform.

Check out the latest earnings call transcript for Groupon.

Person working at computer

Image source: Groupon.

Investing in the health of the marketplace

Groupon takes a fee from the transactions that occur on its marketplace. For the company to be prosperous, it must maintain a healthy marketplace platform with a lot of transaction activity. There are two sides of a marketplace: buyers and sellers. Groupon has invested to ensure both sides of its marketplace find value on the platform.

To increase the number of buyers on its platform, the company invested nearly $400 million on marketing last year. This marketing spend consisted of paid online advertising, such as search engine keywords, as well as offline advertising, such as TV commercials. The investment in marketing attracts people to use the platform, but maintaining an excellent user experience keeps people on the platform.

In a new effort to increase the number of sellers, Groupon has forged partnerships with other marketplaces. For example, Groupon partners with GrubHub for restaurants, Viator for travel, and Live Nation for live event tickets. Groupon splits the fees it collects on transactions sourced from marketplace partners. Although fee-sharing makes these deals less profitable, Groupon is betting that the massive increase in available offerings will make the overall marketplace more worthwhile for consumers.

A marketplace can be a fragile thing if it is not nurtured. If there are fewer people browsing for deals, the marketplace will be less lucrative for businesses. If there are fewer businesses on the platform, people will not find as many compelling deals. By making investments across both buyers and sellers, Groupon is enhancing the health of its marketplace, creating a better customer experience.

Still a strong marketing platform

One thing that hasn't changed about Groupon's story is that it still has tremendous reach for local businesses marketing their services. Aside from Google and Yelp, consumers do not have many options for discovering local businesses. That is probably why Groupon's app has been downloaded over 195 million times and is consistently ranked highly in mobile app stores. Because of its popularity, local businesses likely will continue using the platform to find new customers.

Groupon is adjusting its approach to both the end consumer and to businesses in order to enhance the customer experience and improve the health of its marketplace platform. Some of the changes, especially on the product side, are more experimental and may change again in the future. Other changes, such as adding marketplace partnerships, are long overdue and add a tremendous amount of value to Groupon's platform.

After years of disappointment, it is difficult to assess if Groupon will be able to turnaround and show revenue growth again. However, the new effort to improve the user experience and make bold bets on new products is a sign that the company is taking the challenge seriously.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.