Tuesday, June 7, 2011

Adverse selection, misaligned interests and Groupon

[Sorry about the all-Groupn-all-the-time blogging. We've got some more varied posts in the queue.]

As you might have guessed, we here at OE are starting to get a bad feeling about Groupon's business plan, particularly given that the company's success relies on targeting customers but the company has badly mismanaged the collection of the most rudimentary of customer data.

Another challenge the company faces is adverse selection. In order to be sustainable, Groupon has got to connect merchants with the right kind of customers. If the people who reply to offers are mainly bargain hunters, merchants will realize that these huge discounts aren't worth the money and the whole system will collapse.

You would expect Groupon to try to target 'future regulars' with pitches like "Looking for an excuse to try something new?"

Instead we get this:

This is, admittedly, a small thing, but it shows, at the very least, an inattention to detail and, at worst, a willingness to prioritize getting another email address over protecting the interests of Groupon's merchant partners.

The people behind Groupon have proven extraordinarily adept at running up big numbers and generating hype, but they have shown remarkably little interest in setting up a sustainable, profitable company. Their targeting strategies would have been considered somewhat primitive a decade ago. Their attitude toward customer data is nonchalant (see here for examples of both). They've used a carpet bombing approach to advertising (including the inevitable Super Bowl ad) which generates large email lists but seldom produces high quality ones.

All of this makes me wonder if these people are more focused on the stock price in 2012 than in the solvency of the company in 2020.

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