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Two opinions on the Groupon IPO

David Heinemeier Hansson takes a look at the numbers behind the Groupon IPO:

At the moment, it’s costing them $1.43 to make $1, and it doesn’t look like it’s getting any cheaper. They’re already projected to make close to three billion dollars in revenues this year. If you can’t figure out how to make money on three billion in revenue, when exactly will the profit magic be found? Ten billion? Fifty billion?

On the other hand, Matthew Yglesias says that Groupon is an example of how to achieve growth through aggressive deficit spending:

Maybe this will work out, or maybe it will be a disaster. But it’s worth noting that absolutely nobody thinks it’s categorically absurd to think that what a firm needs to do to maximize long-term profits is boost spending over revenues.

It’s an interesting way to take a jab at critics of economic stimulus.

Update: Jason Kottke points out that Amazon.com operated at a loss for a long time before becoming the profit-generating machine that they are today.

4 Comments

  1. What Jason mentions is the first thing I thought of as well – the old joke was “Amazon loses $1 on each book it sells, but they’ll make it up on volume!”

    However, I’m not convinced that Groupon can repeat what Amazon did. Amazon lost money on books while they were getting their supply chain and customer interface solid, then they expanded into selling other products. It seems like businesses could easily undermine the Groupon model by offering discounts other ways.

  2. Also, David is being a bit simplistic – it’s NOT necessarily easy to make a profit from revenues of $3 billion or any other number, that’s the whole problem. It depends on the business. Revenues don’t mean much if every $1.00 of revenue is costing you $1.43 to “generate”.

  3. Yeah, Amazon lost money at first, and we did scoff at how much of the market they’d have to own to justify that $450 or whatever it was peak (which now doesn’t seem quite so outlandish; they may give Wal*Mart a run for it), but Amazon’s model was sustainable.

    Anyone who’s talked to small business people knows that one-off deep discount coupons rarely work well. They bring in people attracted by the low price. Converting those into real customers is hard. Consistent couponing, as practiced by Michael’s and similar stores, is a different game, and Groupon isn’t playing that.

    We’ve bought a couple of Groupon tickets, used them, enjoyed them, but none of those has turned into a return and full-price experience with those vendors, and my impression is that the businesses using Groupon’s services are discovering that.

    But it doesn’t matter too much: I won’t be buying their stock, beyond that let people gamble as they may.

  4. Oh, I’d also note that: Modern investing isn’t investing, it’s gambling. With that in mind, the question isn’t “does Groupon have a valid business model”, but “are there people who will buy Groupon stock, and will I be smarter than they are in terms of jumping off first.”

    In this way, the market is constantly looking for unknowns. Groupon is an unknown, not a known loser, so is it likely that there’s a straight flush in those hidden cards? No. However, is it possible that some people will think so? Sure. Various VC’s have paid to ante in for the next round, so the hand’s still in play.

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