report prepared for: groupon report: business model ... · pdf fileapmg 8119 group assignment...

APMG 8119 Group Assignment

REPORT PREPARED FOR: GROUPON

REPORT: BUSINESS MODEL ANALYSIS

BY GO DIGIBONKERS

POSTGRADUATE DIPLOMA IN BUSINESS

APMG 8119: DIGITAL ENTERPRISE

ASSOCIATE PROFESSOR DR. NITIN SETH

AUTHOR CONTACTS

NAME: VIRAEK CHEU (145486) SHARI GRENZ (1456206) HIMESH TRIVEDI (1452836) POOJA CORNELIUS (1446842) SWATI CHAWLA (1457595)


Executive Summary

Groupon entered the e-business in 2008 and is one of the world’s largest online

coupon company with close to 40 million customers. The Company declined a $6

billion takeover offer from Google in late 2010. The report examines Groupon business

model by leveraging two theoretical approaches and tools, “Business Model Canvas”

considering nine different components and then a further detailed analysis of the digital

business model (DBM) by the framework of KPMG (2009) focusing digital tribes, value

proposition and revenue model, which have a decisive impact on the company´s DBM.

Initially, the report provides the first six elements among the nine elemens of Canvas

buiness model and then the details of the last three elements (revenue, cost and value

proposition) with incorporation of digital tribes from KPMG’s digital business model.

The revenue analysis is broken down into sectors of local deals, goods and travel that

are the main sources of revenues. Out of this, risks of this type of model are identified,

e.g. the dependence on vendors, but also the advantages for instance the online

business reaches a large target market and has additional revenue stream

opportunities. The report also examines the cost factor and concludes that the different

natures of the costs. More than 80% of total costs are direct costs and SGA which

requires Groupon to improve via a number of initiatives. Furthermore, the report

provides valuable suggestions for Groupon to consider including the review of cost

control structure from activity base to function base and internal legal team to deal with

regulatory issues. In addition, the report analyses the value creation of the company

using the 20 C´s framework of KPMG considering the internal and external

perspective. It shows that Groupon can still improve its customer experience in various

categories. The report aims to provide a practical analysis of this e-business model

concept along with the theoretical and managerial implications.


Table of Content

Executive Summary ................................................................................................... 2

Table of Content ......................................................................................................... 3

1. Introduction ......................................................................................................... 5

1.1. Purpose of the Report ................................................................................... 5

1.2. Business, Industry and Market ...................................................................... 5

1.3. Stakeholders and Shareholders .................................................................... 5

2. Groupon’s Business Model ................................................................................. 5

2.1. Theoretical Background ................................................................................ 5

2.2. Groupon’s Business Model by Canvas ......................................................... 6

3. Revenue Analysis ............................................................................................... 7

3.1. Avenues of Revenue Generation .................................................................. 7

3.2. Consolidated Revenue Figures ..................................................................... 8

3.3. Risks and Advantages pertaining to the Revenue Model .............................. 9

3.4. Key Findings ............................................................................................... 10

4. Cost Analysis .................................................................................................... 10

4.1. Groupon´s Cost Structure ........................................................................... 10

4.2. Risks and Opportunities .............................................................................. 11

4.3. Key Findings ............................................................................................... 11

5. Value Creation Analysis .................................................................................... 11

5.1. Value Creation in General ........................................................................... 11

5.2. Digital Tribe - Digital Clubbers..................................................................... 12

5.3. Value Proposition ........................................................................................ 12

5.3.1. Internal Organisation Perspective ......................................................... 12

5.3.2. External Customer Perspective ............................................................ 13

5.4. Digital Equalizer .......................................................................................... 14

5.5. Key Findings ............................................................................................... 15


6. Summary and Recommendation ....................................................................... 15

6.1. Summary ..................................................................................................... 15

6.2. Theoretical Implications .............................................................................. 16

6.3. Managerial Implications .............................................................................. 16

References ............................................................................................................... 17

Appendices .............................................................................................................. 20


1. Introduction

1.1. Purpose of the Report

The purpose of the report is to provide an analysis of Groupon’s business model, which

focuses on revenue, cost and value creation. Primarily, the report introduces the

relevant theoretical models and tools and then examines Groupon’s practices. It gives

theoretical and managerial implications along with recommendations.

1.2. Business, Industry and Market

Groupon is a global e-commerce market space connecting customers with local

merchants by offering activities, travel, goods and services. It started in November

2008 in Chicago and by October 2010 Groupon served more than 150 markets in

North America and 100 markets in Europe, Asia, New Zealand and South America

and has 35 million registered users. By the end of March 2015, Groupon featured more

than 425,000 active deals globally. Although, the company faced a loss of US$88,946

in 2013 (Groupon, 2014).

1.3. Stakeholders and Shareholders

“Our customers and merchants were all we care about (Mason, 2011)”. Groupon has

faced a new set of expectations from stakeholders who have grown accustomed to

peering deeply into increasingly transparent organisations and accessing the

information they want to make decisions about the company. Similarly, the

shareholders are mainly American investment companies, a list is given in Appendix

A showing the value of the shares they have (Lynley, 2010).

2. Groupon’s Business Model

2.1. Theoretical Background

The report leverages two theoretical approaches and tools for analysing business

models. Firstly the business model analysis follows the “Business Model Canvas”

considering nine different components, key partners, key activities, key resources,

customer relationships, channels, customers segments, cost structure, revenue

streams and value proposition (Strategyzer, 2015). Then the report incorporates with

https://en.wikipedia.org/wiki/Chicago,_Illinois

https://en.wikipedia.org/wiki/Asia

https://en.wikipedia.org/wiki/South_America


a further analysis of the digital business model (DBM) by using the framework of

KPMG (2009), focusing digital tribes, value proposition and revenue model, which all

have a decisive impact on the company´s DBM.

Digital Business Model Framework (KPMG, 2009)

2.2. Groupon’s Business Model by Canvas

Groupon´s key activity, connecting subscribers with local merchants, determines the

company´s key partners and customer segments, which include the local merchants,

other retailers and brands and all internet users but also payment operators, service

providers and operating system providers to offer the Groupon App.


Six parts of Groupon´s business model (Strategyzer, 2015, Groupon, 2015)

The main resources are the customer data and the relations to merchants in order to

distribute appropriate offers to the customers. The channels which Groupon uses are

its website, app, newsletters and additionally social media, for example Facebook with

14 million likes (Facebook, 2015), but the customer relationships are still mainly based

on the daily emails which should support Groupon´s goal to be the “destination that

customers check first” (Groupon, 2015).

3. Revenue Analysis

3.1. Avenues of Revenue Generation

Groupon has done significantly well. In 2013 it held 60% of the market share for the

daily deals market (Chiefmarketer, 2015).

The Revenues are generated from 3 different sources (Groupon, 2015):

Local Deals: Revenue derived from partnering with local merchants such as

restaurants or parlours on a 50:50 partnership.

Goods: Revenue derived from the sale of various merchandise such as

electronics or clothing

Travel: Revenue derived from deals with for example travel based companies

or hotels


3.2. Consolidated Revenue Figures

The pie chart below shows the total revenue that Groupon made at the end of the

financial year for 2014. The company yielded a total of US$3.3 billion in sales turnover

which was significantly higher than the previous year, which yielded US$2.5 billion.

Revenue from their goods/merchandise sector has continued to be the biggest source

of revenues for the group (approximately 57% of total turnover) with the North

American market being their biggest source in terms of geographical location.

Revenue of Groupon per Sector (Groupon, 2015)

The detail breakdown of the revenue per sector for each geographical location is given

in Appendix B.

Local Deals, $1.2 B, 38%

Goods/Merchandise, $1.8 B, 57%

Travel, $175 M, 5%

REVENUE PER SECTOR


Revenue per Geographical Location (Groupon, 2015)

Also, the total revenue generated from new customers was more than the existing

customers (Refer to Appendix C).

3.3. Risks and Advantages pertaining to the Revenue Model

According to the Groupon Financial Report of 2014, there are a number of risks

associated with this type of revenue model. Whilst there may be a down side, there

are however strong advantages as well.

Risks and Advantages of Groupon´s Revenue Model

(Groupon 2015, Indrupati& Henari 2012, Statistica 2015, Wong 2010)

North America, $1.82 B, 57%

Europe, $960 M, 30%

Rest of the World, $395 M, 13%

REVENUE PER REGION


Revenue for Groupon is directly related to the value proposition that the company

offers. A detailed analysis of the value proposition is done in chapter 5.

3.4. Key Findings

Revenues are mainly generated through goods and merchandise, particularly

in North America.

Main risk of Groupon´s revenue model is the dependence on vendors.

Pure online business allows to reach a large target market and additional

revenue stream opportunities

4. Cost Analysis

4.1. Groupon´s Cost Structure

Groupon is a marketspace supplier and agent so its cost are mainly costs of goods or

services, technology and marketing with detail in the Appendix D. The company

spends mostly on direct cost and SGA (selling, general and administrative).

Cost breakdown for 2014 (Groupon, 2015a)

$242k; 8%

$1401k; 43%

$269k; 8%

$1294k; 40%

$1k; 0%$33k; 1%

Consolidated Statements of Operations for 2015

Third party and other

Direct

Marketing

Selling, general andadministrative

Acquisition-relatedexpense

Other (expense) income,net


According to five-year financial data, growth of the cost of revenue was approximately

196% and of operating expenses 32% on average while revenue grew only around

123% on average. Cost has outweighed the revenues (Groupon Inc., 2015), which

can be considered as a matter of concern for the entire business.

4.2. Risks and Opportunities

According to Groupon (2015a), inventory is the main cost driver and particularly the

outsourced shipping and fulfilment costs. Another big cost proportion is the SGA,

which increased after various acquisitions and caused a huge drawback to profit and

loss in 2014. Furthermore, there are a number of potential costs the company may

encounter due to intellectual property claims. In fact, the company has been facing

many regulatory inquiries. In response, a number of initiatives have been carried out

such as

Creating in-house inventory fulfilment (“fulfilment centre”) and reviewing

inventory management

Reducing shipping and fulfilment cost from external logistic providers

Discontinuing a controlling stake in acquired companies

4.3. Key Findings

83% of the costs are direct costs and costs for SGA, another cost driver are the

costs for growth through acquisitions

Activity-base cost

There are a lot of potential costs e.g. for legal issues, regulatory costs.

Various initiatives have been carried out in order to lower the costs.

5. Value Creation Analysis

5.1. Value Creation in General

Value creation is the most important aim for any business entity as it helps selling the

products and services. The first step in achieving value creation is to first understand

the sources and drivers within and outside the company, industry and

marketplace/market space (Amit & Zott, 2000).


According to the framework, given by KPMG, Digital Business Model talks about the

Digital Tribe, Value Proposition and Revenue Model. The digital tribe and value

proposition are explained below.

The Digital Business Model Framework (KPMG, 2009)

5.2. Digital Tribe - Digital Clubbers

In accordance to Groupon the digital tribe consists of people who are e.g. travellers,

food lovers and price hunters. They are “Digital Clubbers” - like the name suggests the

traits are similar to the people who visit night clubs, they are low on loyalties and will

find better deals more suited for them. A study by Rice University's Jesse H. Jones

Graduate School of Business suggests that only 19% of the buyers return to Groupon

for purchasing vouchers (2015) that affects the value proposition of the company.

5.3. Value Proposition

Groupon’s value creation can be analysed using a checklist of 20 ways, the “20 C’s”

(Refer to appendix E) through which the company can provide the value creation

(KPMG, 2009).

5.3.1. Internal Organisation Perspective

The internal organisation perspective of Groupon´s value creation can be displayed in

the six following categories out of the 20 C´s:


Groupon´s value creation – Internal perspective (Groupon, 2015)

Groupon´s website design, order fulfilment processes and payment channels are

essential for the company´s growth through value creation.

5.3.2. External Customer Perspective

The value is not just restricted to financials but also psychological wherein the

customer feels value which further strengthens their relationship with Groupon (Bughin

& Copeland, 1997). Referring to the 20 C´s model of KPMG some parts of the external

customer perspective in creating value are not fulfilled successfully for instance the

categories Comment, Combination and Conversation.


Groupon´s value creation – External perspective (Groupon, 2015)

Additionally, the organisation doesn’t have sufficient backups for dealing with

customer complaints (Refer to Appendix F).

5.4. Digital Equalizer

KPMG’s Digital Equalizer is an online tool using the 20 C´s Framework to visualise

and enhance the value creation through the customer experience and operational

processes to modify the DBM and increasing customer satisfaction.


Groupon´s Value Proposition with KPMG’s Digital Equaliser

(KPMG 2015, Groupon 2015)

5.5. Key Findings

Groupon´s value creation from the internal organisational perspective supports

the company´s growth.

Groupon doesn’t have enough customer interface, better customer care/

services will certainly improve the value creation.

6. Summary and Recommendation

6.1. Summary

Groupon aggressively invested in growth that sometimes was profitable but often led

to mismanagement and losses. The company achieved growth from 2008 to 2011 but

its business model with its revenue model and cost structure has to be modified in

order to increase the company's profit. Additional value creation through


improvements from the internal organisational and external customer perspective can

help Groupon to stabilise its revenue generation.

6.2. Theoretical Implications

Groupon considers all nine fields of the “Business Model Canvas” in its DBM, which

include two parts of KPMG´s framework, value proposition and the revenue model and

additionally the digital tribe. Referring to the 20 C´s model of KPMG, Groupon fits in

6 C's i.e. compelling content, context, coverage, convenience and customer

compensation. But in order to be profitable, generate revenue and increase the value

proposition the organization must follow the following managerial implications.

6.3. Managerial Implications

In order improve the DBM of Groupon and create value the company should take into

consideration the digital equalizer along the revenue model and the cost factors.

Vendor relationships and contracts: Groupon should improve the control

mechanisms over the products/ order fulfilments.

Expansion: Groupon needs to concentrate on geographical expansion along

with an increase in the range of products and should use its opportunities given

by a pure online business.

Adopt the cost by function approach providing a holistic view of each function´

resource optimisation which leads to a better cost management through

utilisation, productivity and efficient improvement

Establishing an internal legal team to avoid unnecessary legal costs in the

future

Combination and Conversation: Groupon should work on bundling together the

services provided along with the opportunity to contact the company directly via

an online chat.

Choice and Comment: Groupon needs to give its buyers better choices of

products and a platform to express their concerns and happiness regarding the

purchased products in order to improve customer loyalty and retention.


References

Amit, R., &Zott, C. (2000). Value creation in e-business: INSEAD.

Bughin, J., & Copeland, T. E. (1997). The virtuous cycle of shareholder value

creation. The McKinsey Quarterly (2), 156.

Capgemini Consulting/ MIT Center for Digital Business (2012). The Digital

Advantage: How digital leaders outperform their peers in every industry,

https://www.capgemini.com/resource-file-

access/resource/pdf/The_Digital_Advantage__How_Digital_Leaders_Outperf

orm_their_Peers_in_Every_Industry.pdf, access on 26th September 2015

Chiefmarketer (2013, September 13). Groupon owns nearly 60% of the U.S. daily-

deals market in 2013, industry to see slowed growth. Retrieved from

http://www.chiefmarketer.com/report-groupon-owns-nearly-60-of-the-daily-

deals-market-in-2013/

Freedman, J. (2015). Functional Based Cost Accounting Basics. Retrieved from

http://smallbusiness.chron.com/functional-based-cost-accounting-basics-

51647.html

Groupon (2015). Financials and Filings Page. Retrieved from

http://files.shareholder.com/downloads/AMDA-

E2NTR/716666907x0x824897/96A29ED7-0479-409A-970F-

1439D7556C1C/2014_Annual_Report_FINAL.PDF

Groupon (2015). Annual Report, http://files.shareholder.com/downloads/AMDA-

E2NTR/769426525x0x824897/96A29ED7-0479-409A-970F-

1439D7556C1C/2014_Annual_Report_FINAL.PDF, access on 26th

September 2015

Groupon. (2015a). Form 10-Q Retrieved from Chicago:

Groupon. (2015b). Second Quarter 2015 Result [Press release]

Helfert, E. A. (2000). Techniques of Financial Analysis: A Guide to Value Creation,

McGrawn-Hill Book Co, Singapore.

Indrupati, J., Henari T. (2012) "Entrepreneurial success, using online social

networking: evaluation", Education, Business and Society: Contemporary

Middle Eastern Issues, 5, (1), pp.47 – 62. Retrieved from

http://dx.doi.org/10.1108/17537981211225853

http://files.shareholder.com/downloads/AMDA-E2NTR/716666907x0x824897/96A29ED7-0479-409A-970F-1439D7556C1C/2014_Annual_Report_FINAL.PDF



http://dx.doi.org/10.1108/17537981211225853


Jin, Byoungho/ Yong Park, Jin (2006). The Moderating Effect of Online Purchase

Experience on the Evaluation of Online Store - Attributes and the

Subsequent Impact on Market Response Outcomes

KPMG (2009). Emerging Business Models to Help Serve Tomorrow´s Digital Tribes,

https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Docume

nts/emerging-business-models-O-0906.pdf, access on 26th September 2015.

Krell, E. (2012). Groupon Serves as an Example of How NOT to Disclose

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management/groupon-serves-example-how-not-disclose-information

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serves-example-how-not-disclose-information

Lappin, J. (2014). Groupon, Down 40% In 2014, Finally Does Something For

Shareholders. http://www.forbes.com/sites/joanlappin/2014/05/05/groupon-

down-40-in-2014-finally-does-something-for-shareholders/ Retrieved from

http://www.forbes.com/sites/joanlappin/2014/05/05/groupon-down-40-in-2014-

finally-does-something-for-shareholders/

Lynley, M. (2010). Check Out The Millionaires (And Billionaires) Groupon's IPO

Minted Today. http://www.businessinsider.com.au/groupon-billionaires-2011-

11#maverick-fund-gained-115-million-off-its-investment-7 Retrieved from

http://www.businessinsider.com.au/groupon-billionaires-2011-11#maverick-

fund-gained-115-million-off-its-investment-7

Mason, A. D. (2011). Read Groupon CEO's letter to IPO investors. Retrieved from

CNN website: http://money.cnn.com/2011/06/02/technology/groupon_IPO/

Retrieved from http://money.cnn.com/2011/06/02/technology/groupon_IPO/

Statistica (2015). Statistics and facts from global tourism. Retrieved from

http://www.statista.com/topics/962/global-tourism/

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September 2015

Thomas, O. (2012). Why Groupon Really Turned Down Google's $6 Billion Offer.

http://www.businessinsider.com.au/groupon-google-deal-turn-down-2012-6

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down-2012-6


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Weingarten, E. (2010, 20). Forget Journalism School and Enroll in Groupon

Academy.Retrievedfromhttp://www.theatlantic.com/technology/archive/2010/1

2/forget-journalism-school-and-enroll-in-groupon-academy/68257/

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http://www.theatlantic.com/technology/archive/2010/12/forget-journalism-school-and-enroll-in-groupon-academy/68257/


Appendices

Appendix.A List of Shareholders

Investor Amount Shares

Owned*

Stake**

The Growth Fund of America $175M 22.2M 3.5%

Technology Crossover Ventures $150M 19M 3.0%

Fidelity Investments $100M 12.7M 2.0%

T. Rowe Price $100M 12.7M 2.0%

Morgan Stanley Investment $75M 9.5M 1.5%

Greylock Partners $65M 8.2M 1.3%

Kleiner Perkins Caufield& Byers $65M 8.2M 1.3%

DST Global $51M 6.5M 1.0%

Maverick Capital $50M 6.3M 1.0%

SLP Green Holdings $50M 6.3M 1.0%

Andreessen Horowitz $40M 5.1M 0.8%

Battery Ventures $23M 2.9M 0.5%

Allen & Co. $4M 506K 0.08%

Guy Oseary Family Trust $2M 253K 0.04%


Appendix.B Revenue generated from local deals per geographical location

(Groupon, 2014)

Revenue generated from travel per geographical location (Groupon, 2014)

North America, $650 M, 54%

Europe, $400 M, 33%

Rest of World, $150 M, 13%

LOCAL DEALS

North America, $1.1 B, 61%

Europe, $500 M, 28%


Goods / Merchandise


North America, $70 M, 40%

Europe, $60 M, 34%


TRAVEL


Appendix.C Revenue Breakdown of Groupon


Appendix.D Cost structure

Cost components Descriptions: (What, Why and How costs were created)

Cost of revenue The cost associates directly and indirectly to revenue generations.

Direct

Cost of inventory Cost of goods or services owned by Groupon.

Shipping and fulfilment costs This includes third party logistics provider, rent, depreciation, personnel and other operating costs from own fulfillment center.

Inventory markdowns Cost of decreasing product or service price from original one to push up sales.

Credit card processing fees Cost of processing credit card transaction online.

Editorial Payroll and stock‑ based compensation. The area of editorial personnel was responsible for drafting and promoting deal. The employees were skillful and high experience writers (Weingarten, 2010). This was vital for business since the promotion messages play critical role in attracting consumers.

Technology The required software for internal utilization and website design in vital in ongoing operations (Groupon, 2015b, p. 6). Groupon offers a mobile application available on iPhone, Android, Blackberry and Windows Phone. It allows users to browse and buy deals on their phones and redeem them using the screen as a coupon to be scanned.

Payroll & stock-based compensation

The function was responsible for operating and maintaining the infrastructure websites and mobile applications.

A proportion of internal-use software

This also includes fixed-assets: for internal and web development was critical for day-to-day business operations (Groupon, 2015b, p. 6).

Other technology-related (email distribution)

It was used for mainly marketing purpose to its millions customers.

Web hosting This was the one of the core selling point which allowing non-mobile users to explore, compare, search, and purchase indeed.

Third party

Estimated refunds by merchants Estimated refunds when the merchant's share was not recoverable.

Operating Expenses

Marketing It was one of the primary strategy to acquire customers and promote awareness.

Online This refers to sponsored search, social media advertisement (such as Facebook and Google), email marketing (One of the Groupon’s advertisement approach by sending massive emails to its millions customers (Cohen, 2012).), and affiliate programs.

Offline Television, radio and print advertising.

Payroll and related stock‑ based compensation

Any personnel cost related to marketing activities.

Others This includes order discounts, free shipping, and lower-margins on deals.

Selling, general and administrative (SGA)

Selling

Payroll and stock-based compensation and commission

Personnel cost and commission for sale representatives


Others (technology, telecommunications and travel)

Any cost relating to and supporting the sales functions

General and administrative

Payroll and stock-based compensation

Personnel cost of general corporate functions: accounting, finance, tax, legal, human resources, customer service, operations, technology and product development personnel

Others Depreciation and amortization, rent, professional fees, litigation costs, travel and entertainment, recruiting, office supplies, maintenance, certain technology costs and other general corporate costs.

Acquisition-related expense, net This cost occurs because of business combination including legal and advisory fees and changes in the fair value of contingent consideration arrangements. It was known as external transaction

Other expense, net

This includes interest expense on capital leases and credit agreement, and losses of equity method and fair value option investments, impairments of investments and foreign currency transactions.

COST STRUCTURE (GROUPON, 2015A)


Appendix.E 20 Cs Value proposition

SR.NO VALUE PROPOSITION PERSPECTIVE

1. Compelling Content

2. Context

3. Coverage

4. Convenience

5. Control

6. Choice

7. Connectivity

8. Community

9. Comment

10. Consolidation

11. Customization

12. Contraption

13. Combination

14. Contribution

15. Conversation

16. Collaboration

17. Citizenship

18. Compliance

19. Customer experience

20. Customer reviews and

compensation


Appendix.F External Customer Perspective

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