The Problem Isn’t The CEO: Groupon Inc (GRPN), Overstock.com, Inc. (OSTK)

Groupon Inc (NASDAQ:GRPN)’s shares shot up on the news that it had fired its CEO. The only thing is that the CEO isn’t the problem.

Deal a Day

Groupon was created around the idea of selling a single product or service, normally from a local merchant, to its network of potential buyers. The deals were heavily discounted, which the buyers liked. And they usually sold out, which Groupon Inc (NASDAQ:GRPN) and its retailers and service providers liked.

When first introduced, this was a completely new idea. Stores found themselves flooded with customers after a Groupon campaign. Which led to more campaigns and more people looking to get in on the deals. At one point, it looked like Groupon would change the face of local marketing, which allowed it to expanded aggressively.

Problems

The biggest problem the company faced was that the deal-a-day model is easily replicated. With no way to protect its market, competition flooded in. While part of Groupon’s success was in creating a large following of potential buyers, the social networks make that increasingly easy to accomplish. Moreover, the company’s list of sellers, another key to its business, isn’t exclusive. So competitors can easily step in and siphon off business.

Some sellers, meanwhile, have found the service less beneficial to their long-term results than hoped. For example, a restaurant owner I know personally experiences an influx of customers after a Groupon offer but found that very few become repeat customers. Privately held Restaurants.com, a restaurant focused competitor to Groupon, works much better, with coupons generating repeat business. Since a Groupon Inc (NASDAQ:GRPN) is little more than a loss leader to get potential new customers in the door, these types of complaints are a big issue.

Buyer fatigue is another problem that Groupon has faced. When just starting out, the company’s service was cool and new. Now, deal sites are commonplace. Moreover, customers started to realize that the deals may be good, but that doesn’t mean they are worth buying. A few expired Groupons would be enough for most people to question the whole concept.

Changing Model

While sales took off at first, the mix of competition and fickle customer tastes quickly led to an obvious need for a strategy shift. To that end, the company has delved into direct product sales, acting as a liquidator. Not a bad business idea, but no more unique than its Groupon Inc (NASDAQ:GRPN) business.