Latest Groupon Quarter A Window Into Daily Deals Business Model And Market

Groupon EPS and Revenue Growth

Groupon stunned Wall Street and observers yesterday by reporting quarterly earnings well above analyst expectations, earning a profit on higher-than-expected $559 million in revenue. What was even more interesting is Groupon’s North American business, which is accelerating despite lower marketing costs. 

Why is this interesting? 

Because Groupon’s North American business is its most mature (indeed, the most mature of any daily deals business), and therefore gives us a glimpse of what a post-growth-phase daily deals business might look like, and whether it can be sustainably profitable. We think it can be, and these latest figures give us hope. 

Here’s why: 

  • Daily deals companies are mostly unprofitable because they spend a ton of money on marketing to grab market share;
  • The question is whether they can sustain revenue while narrowing marketing spending; 
  • In other words, it is whether existing customers buy enough groupons or whether the business is mostly from new customers;
  • If it is the former, then the daily deals business is sustainable, because existing customers will keep generating revenue even as the business’ marketing costs go down, generating profits; if it is the latter, then daily deals are fundamentally an unsustainable business, because they require spending on acquiring new customers that exceeds revenue. 

Even though there had been signs of it since the beginning, the figures from the latest quarter seem to show that it is the former, and that Groupon’s (and daily deals businesses more generally) business is sustainable. 

Groupon’s North America business had accelerating growth even as marketing spending declined. In other words, Groupon’s revenue growth came not from new customers who had to be acquired through marketing channels, but from existing customers. In other words, the most mature daily deals business in the world seems to be sustainable. Which indicates that the daily deals business can be sustainable. Which is an important thing to note as many are vociferously arguing the contrary. 

And this seems as good a time as any to reiterate our thesis regarding Groupon and the daily deals market:

  • Daily deals are indeed a sustainable business and not a “ponzi scheme”; 
  • Daily deals have few barriers of entry but they do have barriers to scale and “moats” in the form of brand recognition, merchant relationships, etc. ; 
  • Because of this scale requirement, the market will sustain only a few “generalist” players alongside a few niche players (either hyperlocal or along specific verticals, e.g. luxury, mums…) ; 
  • Daily deals are a new form of advertising, like the banner ad, and as such it will lead to a large market made up of these large & niche players, as well as publishers who will use it on their own as part of a diversified advertising strategy. 

We’ve been saying this since the daily deals business came to light, and we seem to have been borne out.

(Henry Blodget has also been saying that Groupon would become a sustainable business but the stock would get clobbered it matured out of its hypergrowth phase, which also seems to be panning out.) 

Don’t Miss Henry Blodget’s Detailed Analysis of Groupon’s Business →

NOW WATCH: Briefing videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.