Groupon’s Numbers Day 2: Is the Model Broken?

I have to admit I was “starstruck” by the topline numbers in the Groupon S-1 when it came out yesterday. A number of people have now more carefully gone through the Groupon S-1 (including me), done some calculations and found some disturbing or concerning trends in the numbers. Among them, customer acquisition costs and losses are growing at Groupon. The word “unsustainable” is being used repeatedly to describe the state of the business.

I’m still impressed by Groupon and its prospects but it’s clear that Groupon is under pressure to “fix” some things about the business. And there are major competitors that also put pressure on the company (and potentially its margins in particular). If Groupon buying per customer goes down over time and customer acquisition costs remain high, while margins come under pressure from major competitors (e.g., Google, Facebook) the economics look increasingly less attractive despite the topline growth.

Yipit has an excellent and detailed post that points out all the negatives around costs. These were points also made to me last night on Twitter almost immediately by Scott Wolfgang of Hearst.

Yipit’s Jim Moran examines a “mature” market (Boston) and concludes that the economics deteriorate in Groupon’s core business over time. More competition and, perhaps, “deal fatigue” has lead to declining revenue per customer and increased customer acquisition costs (as customers become inactive or “churn”):

Rakesh Agrawal on Quora raises some issues and asks some questions about information missing from the S-1:

• A key metric for me would be email open rates. Groupon damn well better have that metric in house. They might have left it out for competitive reasons, but it might also be because the numbers are declining.
• I estimate the cost of a list subscriber at $5.50 and the cost of an actual purchaser at $26.50. That’s a big number for a business with few barriers to entry. For Netflix, this number is $18.03 — but Netflix has a subscription business with recurring revenue. Groupon’s numbers should be lower than Netflix’s. I estimate that in order for Groupon to be profitable on a customer, they need to sell three average deals.
• Google just launched its Offers product in Portland. (This post was written at the first Google Offers venue.) Based on the initial set of merchants and offers, I believe that Google is aggressively subsidizing these offers. To the extent that Google continues to do this, it will put a lot of margin pressure on Groupon and others.

GigaOM’s Matthew Ingram presents the two sides of a “is Groupon doomed to fail”? debate that inconclusively played out on Twitter last night.

What do you think?

Now that the dust has settled a bit on the S-1 and some major negatives have emerged do you think that investors will buy the growth story or be put off by the “deteriorating” core business, as Yipit’s Moran describes it?

Update: I just had a discussion with an “insider” (not at Groupon) who made the point that there’s now too much focus on the losses, in his view. He said that Groupon could turn off its marketing and over the next 30 days the company would be immesly profitable.

Here are some numbers on Groupon from Hitwise:

• Groupon.com, by market share of US visits, is the 64th most visited site in the US (out of 1mm+) for the week ending May 28th.
• Groupon.com captured 14 million + total US visits for the week ending May 28th.
• The market share of US visits for Groupon.com increased 564% comparing last week vs. same week in 2010.
• Groupon.com captured 76% of visits among a category of 81 Group Buying sites for the week ending May 28^th.
• Searches for “groupon” in the US have increased 462% comparing last week vs. same week in 2010.