Groupon shares soar after listing: Five reasons it can keep rising and five reasons it can’t

Groupon finally listed on the American stock exchange last week, breaking all expectations as shares quickly rose from $US20 to $US28, becoming the third major technology company to list on the stock exchange just this year.

Although Groupon has sold just 5.5% of its outstanding shares, the company has raised hundreds of millions of dollars and made its founders extremely wealthy, including chief executive Andrew Mason who is now a billionaire.

But there’s still plenty of controversy over the company, which is only just a couple of years old. Although it has skyrocketed to success, it isn’t yet making a profit and some analysts are concerned it isn’t making money fast enough.

Although a float may keep Groupon on its toes, there are some very real concerns over how it’s operating. With that in mind, here are five reasons why the company could fail – and five reasons why its success will continue.

Five ways Groupon could fail:

It’s just an email list

Groupon doesn’t have a specific product. It’s a marketing channel – the entire company is based on an email list. Granted, that email list has millions of people on it, but that doesn’t necessarily equate with sales.

Some businesses hate it

While Australian businesses might be satisfied with how their deals are going, it’s not necessarily the same for Americans. Research from the Harvard Business Review from earlier this year found that half of the 150 merchants surveyed wouldn’t do another deal.

The main reason was that repeat-purchase rates were so low – only 13% of businesses surveyed reported getting repeat sales out of their deal. Having a discount deal bringing you customers is great, but not if they don’t come back.

It’s not actually making money

That’s right. Groupon has yet to turn a profit, despite revenue of $US1.7 billion. There is some encouragement from the fact its North American division recorded a profit last quarter, but the company is far from delivering rivers of gold.

Low barriers to entry

The plethora of daily deals sites that have sprung up since Groupon began is telling. This is a low-barrier industry, and consumers are notorious for being fickle. There is no loyalty to Groupon, only what it can provide.

As long as it can keep giving good deals, then it can survive, but that really depends on the sales team. Groupon will need to keep pumping effort into that area to stay ahead.

The market could change

Right now, customers in both Australia and the United States are keen on saving. Having come through the financial crisis, they are wary of anything full price and are desperate for the next deal that will save them money.

But that’s a market that won’t last forever. Discounts are the hot thing now, but in five or 10 years, the situation could be vastly different.

Groupon has taken advantage of a dramatic shift in the western economy. But will it be successful enough to react to yet another – and inevitable – change?

Five ways Groupon could succeed:

Money is actually getting better

Groupon isn’t profitable yet – but it’s well on its way.

Amended financials show the company narrowed its loss to just $1.7 million in the third-quarter, and marketing expenses have been reduced as well.

As the company eases down on marketing, profit won’t be far behind.

Everyone loves a deal

No matter what, consumers love a deal. Some of the biggest discounts Groupon has sold – like a discount for Gap jeans – have raked in millions. More big deals like these will ensure Groupon’s long-term success, even if the smaller deals aren’t as fruitful.

Localisation

As more group buying players have entered the market, the sector has been pushed towards localisation. Buyers are more likely to get a deal for a business they know in their area as opposed to a national deal.

As Groupon starts focusing on more localisation and customisation, especially for instant deals like Groupon Now, more customers may start responding.

Knock-offs don’t matter yet

Groupon has one main competitor in the United States – LivingSocial. The rest are too small to matter.

While the situation may be a little different here in Australia, Groupon has a significant amount of control over the US market and will continue to operate that way for some time as it pushes more money into sales.

Strong branding

Coupons aren’t an inherently attractive business venture, but Groupon makes them interesting and cool. They’re easy to share around with friends and customers who want to actually tell people about them. The desire for deals may wane but much of Groupon’s success lies in the branding.