Groupon Inc (NASDAQ:GRPN) has faced its share of problems since its initial public offering last year. Most of those problems, however, have not been external. Groupon’s issues have almost all come from the inside. Now businesses are lining up to attack the tech company, hitting at its most visible vulnerability.
The idea of a sustained competitive advantage, or a moat, was popularized by Harvard Business School’s Michael Porter. It involves a company having something that is not available to its competitors that allows it to compete over a long period. It involves having access to something that is hard to copy.
Pfizer Inc. (NYSE:PFE) has a patent on Viagra , The Coca Cola Company (NYSE:KO) has a huge advantage in legacy branding, and Microsoft Corporation (NASDAQ:MSFT) has a user base that has been using its products for as long as they’ve used computers.
A sustained competitive advantage is not just gained through having incumbency in an industry however. Groupon has incumbency. A company needs something more than that. A new company might have an innovative marketing strategy, or customer service provision, or anything else. The essential idea behind a moat is that a business has something that gives it a competitive advantage and is hard to copy
Groupon has no ability to sustain its competitive edge. It’s business model involves no propriety technology. The firm is the major incumbent in its market but does not have a major advantage in marketing. Groupon may have a massive user base, but engagement is much lower.
Groupon tends to communicate through emails with details of daily deals on them. Those deals are easily ignored as more spam in an inbox. With nothing to hold onto, except a modicum of brand recognition and relationships with clients, there is simply nothing stopping a competitor from taking Groupon’s business away.
That’s now happening in droves. Hundreds of sites with the exact same business model have popped up all over the world offering daily deals to their users. These are not the problem for Groupon in the short term however, the company does have some competitive advantage against them.
One of those businesses may overtake in the longer term but the real threat right now is a business arriving that might do something better and might actually build a moat around its business. Bloomberg published an article today on one of the most substantial threats to Groupon.
Customer loyalty cards, operating through credit cards, automatically give users discounts on their purchases at participating merchants. The merchants also have access to data on when customers purchase their goods and their personal information. Those offerings are appealing to merchants in a way that Groupon cannot replicate.
The service has two major advantages over Groupon’s. It’s less labour intensive for customers and it offers extra benefits to merchants. Some of the services even offer redemption of rewards in the form of virtual prizes, such as currency for Zynga’s social games.
Groupon will face substantial competition if firms like that manage to increase in popularity. While offering a slightly different business model, the eventual product is substantially the same. Groupon will have to find something innovative it can do to combat competition from the growing sector.
Groupon needs to do something that makes it a better business that cannot be copied easily. If they cannot do that, and nothing they’ve done so far has indicated that they can, someone else will get into the sector with a business model that has those attributes. Groupon is in trouble, there appears to be little evidence of a solution to its problems.