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Groupon may be one of the hottest consumer internet startups ever, but its credibility in the tech community has fallen substantially in recent months on the heels of the company's IPO filing.

The reason: to many, Groupon's financials look downright questionable, leading some to question whether it's a company built in the mold of .com failures that imploded little more than a decade ago or worse -- a Ponzi scheme.

Groupon has been forced by the SEC to revise certain portions of the picture it has painted for prospective investors, but the company can't mount a strong public defense because it's in the quiet period.

But that isn't stopping Groupon's CEO from defending his company internally to the thousands of people it employs.

In a strongly worded and very detailed email to his staff, Mason took aim at everyone from the company's critics to its competitors. The most interesting thing about Mason's email: the discussion around the company's email list, which it is essentially betting the farm on.

On this, Mason wrote:

Our marketing — at least the customer acquisition marketing that we remove from ACSOI — is designed to add people to our own long-term marketing channel — our daily email list. Once we have a customer’s email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald’s, or most other companies.

If I’m a Johnson, and I’m trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you’ve bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid.

There is no cost of reacquisition — that’s unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.

He went on:

Eventually, we’ll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we’re acquiring as many subscribers as we can as quickly as we can.

We aren’t paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we’ll run out of people we can add to our email list.

We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us.

Long story short:

  • Groupon thinks its email list is the gift that keeps on giving, and thus, it's the company's most valuable asset.
  • That has made spending big bucks to grow the list a no-brainer.
  • Eventually, Groupon will have so many subscribers, it won't have to spend much money on marketing (or so Mason believes).

On one hand, Groupon is perhaps one of the best examples of how an 'old-school' channel -- email -- can drive the growth of a business. A few short years ago, Groupon didn't exist. Today, it's a billion-dollar company, thanks in large part to email.

On the other hand, anyone who has been involved in email marketing for some time will point out that Mason's beliefs seem unrealistic, if not naive. Subscriber acquisition is just one part of the email marketing equation; keeping subscribers and converting them is just as important.

Here, there's evidence that Groupon is going to increasingly face some challenges:

  • As the number of Groupon subscribers has grown to over 115m, the number of actual customers as a percentage of subscribers has slipped. In Q1 2010, this number stood at just over 25%. In Q2 2011, it dropped to just over 19%.
  • The number of coupons sold to subscribers is dropping even faster. In Q1 2010, coupons sold/subscribers was a healthy 51%; in Q2 2011 it fell to just under 34%. In other words, more subscribers aren't buying.

Qualitatively, Groupon's challenges aren't surprising: the 'daily deal' has been largely commoditized and Groupon has lots of competition. Groupon is an ecommerce play, so there are few if any network effects. And because Groupon is location-based, it will, in theory, one day 'run out' of new merchants to sell groupons for.

So what does this mean?

Groupon doesn't need to worry about subscriber acquisition; it needs to worry about keeping its emails relevant and maximizing conversions. Without investment in subscriber retention and targeting, its email list will inevitably deliver declining returns.

Unfortunately, Mason's email hints that the Groupon leader has an overly simplistic view of email marketing, one in which lists take care of themselves and continue to produce with minimal investment.

That's not the case, and thus, unless Groupon figures out that subscriber acquisition is not the end-all and be-all of email marketing, it may become the poster child for both email marketing success and failure.

Patricio Robles

Published 26 August, 2011 by Patricio Robles

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

2377 more posts from this author

Comments (14)

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David Riordan

Great article Patricio - the guys (or the one guy) at Groupon doesn't seem to get it. You have to work hard to keep your customers by delivering relevant, desirable content. You don't own a customer's address - they consent to give it to you because they value your information. Never forget that.

almost 5 years ago

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Pete Austin @MarketingXD

Re: "Once we have a customer’s email, we can continually market to them at no additional cost."

Nonsense. He ignores subscriber quality and churn.

Every time an email is sent, a percentage of recipients will get fed up with Groupon and stop opening its emails, or route them to a bulk folder, or simply unsubscribe. These actions reduce the value of Groupon's list and mean that emailing has a significant additional cost.

almost 5 years ago

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Mark Quinn-Newall, Consultant at E-commerce

Interesting article - thank you, one key metric which appears 'absent' is what are the unsubscribe numbers on the '115 million' list, and how significant are the unsubscribe rates over time, as list members, progress from brand new subscribers in their first week / month / quarter on the list, to longer term subscribers, because it is possible that finding long term subscribers who will either want or will 'tolerate' a daily email about diverse deals may be significantly harder than maintaining a single specific business list which would be sending relevant emails & utilised perhaps less frequently....
Another minor negative effect (less significant, but relevant over time) could be the number of emails ceasing to be valid for multiple reasons, one example, people subscribing on work related emails, and then changing jobs, and not re-subscribing... All of which will chip away at the long term residual email list value....

almost 5 years ago

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Stephen Cullen

Interesting article but no real surprises. Some of Groupon's "offers" look like discounts off already hyped prices, therefore devaluing the brand.

My own recent experience was to buy a canvass photo-print with a 10 day delivery time and it took two months, and that was only after sending numerous emails and finally plastering complaints on Facebook! I have no doubt the service would never have been delivered but for making a pest of myself.

Poor Customer experience reduces repeat business............and motivates disgruntled customers to write about it on blogs......... like this one.

almost 5 years ago

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Paul Anderson

I couldn't help but smile when I read this article by Patricio.

A while ago a friend of mine asked me 'why is Groupon 'crap' at email marketing?'

At the time I couldn't figure it out - I mean, you had this company that everyone said was the next big thing, oodles of money was being invested in it and it was on the way to dominating the world. And yet, their email marketing was, to coin a phrase 'Crap'.

Now we know why.

I've been involved in email marketing for over 12 years, and whilst I don't claim to be an expert, one thing I do know is that it costs.

It costs time and money, and oh yes, skills; to create and run an effective email marketing strategy.

If Groupon invested in their email marketing, perhaps they will end up dominating the world, but if the team at the top think it's 'free' - and all you have to do is 'blast out emails and hey, we'll all make a lot of dosh' - then I for one won't be investing in them.

If they read this article, perhaps Groupon will now unsubscribe my email address from their lists - god knows I've tried many times without any luck!

almost 5 years ago

Jignesh Ghaghada

Jignesh Ghaghada, Managing Director at TreatHer.com

Great article. In my mind it's been just a matter of time before someone pointed out the emperor had no clothes on.

The whole Groupon model is fundamentally flawed, not just because of the reasons highlighted in this article, but also because this doesn't provide long-term value for companies in the way that many of them are duped into thinking it will.

There are several examples of small restaurant and experience companies that have very nearly hit the wall because they received too many loss-making visitors during a busy period of the year. The aggressive sales teams at Groupon paint a very attractive picture for these companies, but those that those don't think this "great free marketing strategy" through well enough will stand to lose out big time. In many cases, there is not enough reason for a visitor to return after redeeming their Groupon voucher and therefore no long-term value for the company.

And once enough companies realise this, I suspect Groupon's merchant list will dry up much faster than it anticipates.

almost 5 years ago

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Jonathan Spitz

Groupon's seemingly naive approach to the need for investment in cutting-edge email marketing strategy/execution is both a double-edged sword and the tip of the iceberg in terms of their future challenges.

The multitude of Groupon knock-offs grew quickly not only due to the extremely low barrier to entry, but also because several real email marketers recognized exactly what this post points out: Groupon's approach to email marketing is at best clumsy - or "crap", as Paul's friend above puts it. Almost every Groupon competitor today does email marketing better than Groupon.

The flip side? If Groupon wakes up to this fact, it won't take much to bring on a few bright minds to get it right. Of course it will cost, but of course it will be worth it.

And with the size of the list, really smart guys can apply data overlays to do data mining that can drive conversion rates back up.

Perhaps a bigger challenge: Groupon runs out of businesses to put out of business (with their aggressive push for deals that produce large losses without the promised repeat business) before they run out of consumers to acquire!

almost 5 years ago

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Killian @ Open Plus

Thanks for this informative piece. It's great to see a systematic treatment of some of the opinions that have been doing the rounds for months now. It strikes me as slightly defensive that this email was sent out. Surely they have better ways of improving staff morale?

On another, smaller point: 'Johnson' hardly needs to promote a free newspaper (not that this plan is in the pipeline). Surely Johnson could just develop an email list with daily offers on Band Aids?!

almost 5 years ago

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Tom Sharp

Interesting stuff - as a (former) Groupon subscriber then frequency of irrelevant offers led to e mails being ignored and then unsubscribing.
As a potential supplier I am targeted every week by aggressive sales teams who have no understanding of our brand trying to convince us to participate in loss making promotions.We will never do this for 2 reasons - the long term damage to our premium brand through taking part in such an obvious and huge discount and the poor customer experience that I have had personally. I am certainly no expert but seems like Groupon have lost sight of basic principles of branding and segmentation before we even get to their unsubscribe rates (even if they don't seem to let you go without a fight...)

almost 5 years ago

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Andy Davis

Great article - we'll see more stories like this. The model is too easy to copy, and the nature of the business doesn't promote customer loyalty. Being first doesn't really count for much.

Another stat missing here is how many people on the list are essentially the same person.

Between work and personal email addresses it is easy to hold multiple accounts to access an early voucher promotion. For a couple that could be 4-6. In real terms after that initial deal only 1-2 will be live.

almost 5 years ago

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Alex Timlin

The email to staff is great insight into the mindset of Andrew Mason and no doubt GroupON as a whole.

People working in the digital marketing industry will be horrified, and rightly so, at how the CEO of one of the world's most hyped businesses 'just doesn't get it'.

The problem is they don't see customers, they see email addresses as a product, their focus isn't great experiences for people, it's an audience for GroupON's that they can flog to death.

Email isn't free - you have a huge amount of staff dedicated to sending them and two ESP's you pay to fulfil them - but it is cheap.

When investors turn the tap of (whenever that is) they'll struggle to switch to a customer focused business, but he does have a point, they have more than 100 million email addresses and they'll just mail daily and they'll still make money... just no where near as much as they could

almost 5 years ago

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Groupon Clone

Its a interesting stuff there!!!! people working in the digital marketing industry will be horrified and rightly so, at how the CEO of one of the world's most hyped businesses just doesn't get it...

almost 5 years ago

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Jordan Cohen

Everything said in the article and comments about the importance of email relevancy and retention is 100% valid. But, as email marketing veterans know, continually adding new subscribers is just as important, isn't easy, and can be a pretty expensive but necessary cost of doing business.

The average email marketer sees 30% list attrition every year via opt-outs/unsubscribes, spam complaints and bounces (usually meaning the email address someone originally signed up with is no longer valid). And that's just the tip of the iceberg -- large numbers of subscribers who stay on lists eventually become "disengaged," never opening, clicking or purchasing in response to a brand's email anymore.

Brands with the biggest email marketing programs spend millions each year to make up for subscriber attrition and disengagement, and to continue expanding the size of their email list with fresh email addresses of new customers who are the most likely to respond.

almost 5 years ago

Mark Patron

Mark Patron, Consultant and non-exec director at Patron Direct LtdEnterprise

Great article. An interesting metric is value of a name. Groupon's value has been quoted at anything from $2bln to $20bln, valuing the 115m email list at $17 to $174/email address.

almost 5 years ago

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