Online group buying sites were among the most popular websites in 2011 beside the social network websites. They offer daily deals to consumers that feature deep discounted gift certificates usable at local restaurants, beauty salons, massage centres, bakeries, and many more businesses. The industry was deemed as the fastest-growing industry last year. The business model works particularly well during recession where consumers constantly look for cheaper deals online. And the biggest of the industry, Groupon, went public last year with a staggering valuation of $14 billion, while they were still making a loss for the fiscal year. From the day one, the business model has been taking a lot of hits, with investors doubting its sustainability and real benefits brought to businesses which advertised on the websites. 

In an industry where the entry barrier is almost to none and has low switching costs. Groupon customers can always easily switch to its competitor, Living Social, if they were to offer better deals than Groupon. Hence, the advertising cost and customer acquisition costs in this industry is surprisingly high, such that in 2010, Groupon’s marketing expense were almost 91% of its revenue. Although it improved slightly in 2011, marketing cost represent a huge concern for daily deal providers. Living Social, which Amazon owned 31% of the company, reported a loss of $558 million from $245 million revenue in 2011. 

To make the matters worse, according to the recent survey by Yipit and Susquehanna Financial Group, it found that 52% of the surveyed merchants are not planning to feature deals  in the next 6 months, as there is not evidence that customers who bought coupons would be a returning customers after spending on the coupons. However, undoubtedly, Groupon remains as a very useful and popular platforms for new businesses to advertise and to gain online traffics in their initial stages. But are they useful in the long run, I am personally not so optimistic, especially reading the HBR article. Groupon and other deals provider websites have to come up with better business model to retain customers and try to differentiate themselves. 

Sources:

The future of Groupon’s business model, http://blogs.reuters.com/felix-salmon/2011/08/27/the-future-of-groupons-business-model/

The Problem with Groupon's Business Model, http://blogs.hbr.org/hbr/mcgrath/2011/07/the-problem-with-groupons-busi.html

How Sustainable Is Groupon's Business Model?, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2784

Groupon: Restated Numbers Reveal Failure of Business, http://www.sequenceinc.com/fraudfiles/2011/09/groupon-restated-numbers-reveal-failure-of-business/

LivingSocial Lost $558 Million In 2011, http://articles.businessinsider.com/2012-02-01/tech/31011853_1_livingsocial-groupon-amazon

The Chart That Will Scare Away Many Groupon Investors, http://blog.yipit.com/2011/10/21/the-chart-that-will-scare-away-many-groupon-investors/

Groupon shares drop on concern about merchants, http://www.reuters.com/article/2012/01/03/us-groupon-merchants-idUSTRE80210020120103