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.