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Groupon Investment Appraisal- one can raise a few doubts over Groupons business model and their current strategic position.

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Introduction

Investment Appraisal Business model Groupon's business model relies on a simple idea: customers register with the website to get daily deals in their area. If a sufficient amount of interested buyers is reached, the company uses its buying power to get an important discount.1 The firm has rapidly expanded through markets in North and Latin America, Europe, Asia, and has reached more than 30 million customers and 142 million email subscribers.2 As we are considering an investment opportunity, it is relevant to mention that Groupon makes its margins by taking a percentage off the deal offered by local providers. The group has had a fast growth supported by a huge customer's and merchant's base, along with the ability to provide a large range of deals. ...read more.

Middle

Customers have no switching costs (Amit and Zott, 2001) and a high power; they are thus free to switch to other deals. The large success of Groupon has also brought several local businesses into trouble because their operations could not scale3 and now, local businesses have many alternatives for customer acquisition, which has weakened the firm's business model. Marketing takes too much importance in their value chain, and in order to create customer and brand loyalty, the company has to spend most of its revenues on marketing. Although the group has exploited well its first mover advantage, firms following this business model such as Google or Living Social are believed to have stronger assets (see Appendix). ...read more.

Conclusion

All in all, their business model does not appear operable to us. The ability to imitate it will make it difficult to maintain their sustainable advantage against competitors with stronger assets. Groupon could become generic, or just an interesting opportunity of advertisement for local merchants. Their doubtful accounting practices are unlikely to attract investors. Finally, revenue growth is flat (see Appendix) and the hyper-importance of marketing in their model makes it very difficult to reduce their costs without losing customers or merchants. One can therefore consider Groupon as a company with bad long-term growth prospects. We do not recommend investing in Groupon at the moment. The company is facing several challenges concerning its business model and its financials in a near future, and it would be safer to wait until their organizational capabilities provide them a competitive advantage again. ...read more.

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