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Why is Groupon losing so much money?
The article, Groupon Doomed by Too Much of a Good Thing, stated that Groupon posted a net loss of $113.9 million in Q1 11, and they've decided to remove the ASCOI metric from their financial statements. How is a company so big losing so much money? Secondly, won't removing the ASCOI metric cast more doubt on their ability to become profitable?
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4 Answers
Caty
Not sure if you saw the following Techcrunch article - I think a lot of answers to your questions reside within:
http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/
That was a long way to go for a short answer, but it's really instructive.
As for the "ASCOI metric" it reminds me of the first internet bubble days. The concept that if you throw enough money at marketing, eventually it "sticks" and you get profitable.
A bunch of us had a good laugh about that metric the other day.
Bottom line, the only party the Groupon is good for is a bargain hunting consumer.
A simple answer could be:
Because the reward metric for the business owner has fluctuation in terms of profitability and does translate well across various products and services offerings.
Groupon lost another $103 million during Q2, but even more alarming is the fact that the company reports that its "merchant pool," (i.e. those merchants it has contracts with), declined for the first time ever from Q1 to Q2. Many view this as a signal that margins are likely to deteriorate in the face of increasing competition.
With regard to your reference to the company's size, Caty, in an HBR article, http://www.businessinsider.com/groupons-main-problem-is-that-it-hasnt-yet-dis..., the author argues that Groupon's fundamental problem is that it has yet to discover a viable business model, despite its growth. He quotes Clayton Christensen, who suggests that, aside from a few notable exceptions, "businesses should become profitable before they become big."
If you think about it, this makes sense. In many cases, companies can achieve significant economies of scale through growth. Economies of scale aside, however, unlike a few exceptions such as Facebook, growth, in and of itself, has no intrinsic value. To a large extent, the growth of Facebook's community of users creates real value above and beyond economies of scale (As a simple example - you buy a product because your friend "likes" it. In essence, value is created merely by the fact that both you and your friend are users.)
Groupon's mythical earnings metric can almost be interpreted as saying, "despite the fact that we're growing like crazy, we still haven't figured out how we're going to earn a real profit."
It brings to mind, the old phrase, "we lose money on every sale, but we make it up on volume."
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