What do Fab and Groupon have in common?

2013-01-15 2 min read

    Groupon has fascinated me since they’ve launched. It popularized an entirely new business model, encouraged the launch of hundreds of competitors, and was able to IPO three years after being founded. This sounds great until you look at the performance after the IPO: the stock is down 80% and it’s consistently missing the quarterly goals.

    The daily deals space isn’t as profitable as it used to be and they’re trying to become a tool platform for small businesses. To grow beyond daily deals, they’ve been on an acquisition spree. Over the past two years they’ve acquired a scheduling startup, a social shopping startup, POS system, and a restaurant reservation system. I don’t think this will be enough for them to get seen as something bigger than daily deals.

    Groupon grew by providing steep discounts to consumers but sacrificed businesses in the process. It will be a hard sell trying to get a business to use your tools when a few months ago you were telling them to discount their products more than 50%. I understand that they needed to do this to grow and I’m sure they even had a choice: the space was so competitive that if they didn’t do this someone else surely would have. It just puts them in a pretty tough spot.

    Recent fast growing ecommerce businesses have also favored the consumer over the business. This leads to quick initial growth but causes problems in the long term. Fab is taking this approach as well by providing steep discounts on designer products. Consumers are loving it but what happens when there aren’t any businesses left who are willing to agree to such a discount? Sure, using Groupon and Fab can be viewed as a marketing expense but I suspect they and their investors want to be seen as more.

    It’s difficult to balance the needs of the various sides of a marketplace. You do want to subsidize one side but it’s dangerous to favor the consumer side so much since it’s difficult to distance yourself from. Maybe it is the proper approach in the beginning but there needs to be a way to get out and I think that’s a tough problem. Etsy and AirBnB had slower growth but were able to align the incentives of the various sides of the market early on. It was easier for them since there’s overlap between the two sides (sellers are buyers and buyers are sellers) but I suspect this is still the right approach for long term success.