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Groupon's eclectic CEO Andrew Mason is fighting for his job, and his company is fighting for its life.

One of the fastest growing companies ever, the daily deals behemoth's decline is happening faster than its rise, creating an interesting spectacle that will one day be ideal fodder for MBA students, if it isn't already.

According to PandoDaily's Sarah Lacy, one of the lessons in the "Groupon disaster" is that aggressive international expansion can be costly and perhaps even fatal.

"International markets hold a ton of promise, and many of the entrepreneurs to be found there should be taken seriously as competitive threats," she writes. "But the execution risks aren’t to be taken lightly. You rarely hear a startup say, 'We failed because we were just too focused on our core business.'"

Overestimating the importance of first-mover advantage

Groupon, like many consumer internet companies today, has always lacked a wide moat. Building a Groupon-like daily deals site doesn't require significant capital; you can buy clones for less than $100. Acquiring an audience of potential customers and getting merchants to come on board may not be child's play, but it's not like building a new social network, where network effects rule and entrepreneurs face a chicken-egg challenge.

So to ensure that it didn't cede control of lucrative international markets, Groupon employed a seemingly rational strategy: use its boatloads of capital to expand internationally as fast as possible.

As Lacy sees it, "the fear of a local clone being first to market and gaining a foothold that can’t be broken later shouldn’t outweigh every other problem a startup CEO faces." In other words, if you're really good at home, not being first in foreign markets is less of a disadvantage than it might otherwise seem.

That may be correct, but the question remains: can Groupon legitimately blame its international expansion on its current woes? While the capital it exhausted overseas would have certainly been useful now, the answer, realistically, is no.

Blame the itinerary, or the traveler?

Even if Groupon's international expansion was at times uninspiring, the company's problem is that the daily deals model it popularized was shaky to begin with. In every city, there are only so many merchants eager to heavily discount their services. And once those merchants learned the hard way that a substantial percentage of the bargain-hunters coming through their doors weren't interested in a long-term relationship, the challenges and perils associated with hefty discounts would be revealed quite quickly.

Put simply, the billions of dollars in revenue Groupon managed to generate in short order masked the fact that the daily deal craze had simply not been validated. After all, real validation requires that questions over longevity be answered.

From this perspective, Groupon was moving into international markets with model that was destined to be as short-lived as the deals it was hawking. One need only look at the woes at LivingSocial to see that Groupon's decline isn't the result of its international expansion. There is an industry wide trend here, and it's not good.

Validate first, expand second

The internet is the most powerful platform for global commerce the world has ever seen and entrepreneurs and business owners are foolish when they ignore the opportunities the internet provides vis-à-vis international expansion. That's not to say, of course, that expansion is easy. Dealing with language, culture and regulations can all be challenging, and mistakes related to a foreign expansion can be incredibly costly.

That's why, in addition to making sure you understanding a market and develop a solid expansion strategy before moving, it's important to ensure that you are exporting a business that's built to last.

Patricio Robles

Published 3 December, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2390 more posts from this author

Comments (3)

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David

There is a lot of Groupon haters out there! Geez. Getting a little thick!

Everyone is an expert it seems. I think its very simple. Either there is a market for connecting businesses to people who want a discount or not. If there is, who will dominate?

If you were going to tell me that buyers will get discount fatigue and start demanding that everything always be full price then you have bigger problems than Groupon. lol

Yes that is sarcasm. lol Seriously though. People want discounts and businesses want a sure bet on customer acquisition. Have you priced a local TV ad lately? Last I checked the production companies alone wanted around $5,000 per minute. That is not to mention the air time costs. Any guarantees customers will come through the door?

Groupon offers a customer acquisition at a risk that is easy to estimate. If your business knows your normal cost per acquisition then you know what margins to offer Groupon. It's not rocket science although traditional advertising seems to require a magician.

Bottom line, Groupon is a winner and is simply going through a market shake up mostly fueled by the ignorance of the mob. Not saying everyone is ignorant. I am saying people who say stuff like "daily deals are going to die" are probably not web marketers to say the least.

over 3 years ago

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Double e

Thank you David, clearly understood and agree with most of your points. The article writer, like many as of late, use the same exact fodder to push for more readership.
Example. The whole groupon doesn't have a moat bs... Ya anyone can start a similar company. Groupings moat is its hundred of millions of users.
David's thinking is pretty solid. Most consumers want a discount on goods and services. In a free market we will often go toward price and guess what (business complaining about groupon), if your product or service ends up sucking we will probably not be a return customer.
I can tell you from experience, every groupon I have used that was great to me I have told tens of people! This business is here to stay and will only have growth from here.

over 3 years ago

Peter Bell

Peter Bell, Managing Director at Fuse Lead Marketing

Totally agree with the guys above. Last time I looked Groupon were a $2.5bn global business with over 100m members. The issue is the market is not an big as people thought it was (yet). But it is still massive. Coupons, discounts, vouchers are here to stay.

over 3 years ago

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