Why Groupon Lost… and Luxury Escapes Won

Why Groupon Lost… and Luxury Escapes Won

What if the biggest mistake in business isn't charging too much but charging too little?

Groupon changed the way the world discovered deals, turning a simple two-for-one pizza promotion into a company once valued highly enough to attract a reported US$6 billion takeover offer from Google. But while Groupon built a global discount empire, a new generation of businesses quietly built something far more valuable: trust, experiences and ecosystems.

Peter and Kiran unpack how Groupon transformed consumer behaviour, why thousands of merchants discovered that more customers didn't always mean more profit, and how businesses like Luxury Escapes, RedBalloon and Big Red Group evolved beyond coupons to create stronger, more profitable business models.

Along the way, they reveal the hidden economics behind a $100 sale that leaves a merchant with around $41, why discounting can become one of the fastest ways to destroy margins, and the critical difference between businesses that compete on price and those that compete on value.

If you've ever discounted to win customers, wondered whether marketplaces are still a smart business, or wanted to understand why some business models compound while others stall, this episode will change the way you think about growth.

Key Takeaways

• Discounts attract customers, but ecosystems create lasting businesses.
• Revenue growth means very little if your margins disappear.
• The strongest businesses compete on trust, not price.

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Transcript

SPEAKER_00 0:09

Let me ask you something. If I offered you a Ferrari for half the price, would you buy it? Of course you would. Now, what if I told you the Ferrari dealer only got paid 40% of what the car's actually worth? That's basically what Gripon asked thousands of business owners to do. Restaurants, massage clinics, hairdressers, adventure companies, hotels. The customer wins, the platform gets paid, but did the merchant ever make any money? And today we're pulling apart one of the biggest internet business models ever created. A business Google once tried to buy for six billion dollars. That's billion with a B. And a company that changed retail forever. And a business model that almost every entrepreneur misunderstands. Because this isn't really an episode about Groupon. It's an episode about one particular question. Can discounting ever become a moat? Welcome to Good Bad Business from Apickle, the team that removes K bits from director's home. And every week we analyse a different business using one framework. The Moat Strategy. Margin, Operation, Advantage, and TAM. And then we asked two questions. Can you generate your first million dollars in revenue? And is it a good business? Is it a bad business? Or are you actually going to get into a pickle? And today, unfortunately, Rod's off stick, but we have a new special guest, Kiran from Borrowers First. And our podcast sponsor is still Rod from Eventum Optimum. And today's episode, look, it's gonna feel a little bit different. Kiran, welcome to your first podcast with Good Bad Business.

SPEAKER_02 1:58

Thanks, Pete. Really good to be here. I love the fact that you're actually analyzing one company, not just one, but it's an entire concept here. And um, we're actually analyzing a whole new business model, and that's much harder, isn't it?

SPEAKER_00 2:11

Definitely is. So let's zoom out. In 2008, the global financial crisis, businesses were actually desperate, and consumers wanted bargains, and groupon appeared well, you know, it's a good deal. A two-for-one pizza, 24 people bought it. Simple, right? Brilliant. And consumers absolutely loved it. Businesses flooded in, Google reportedly offered six billion dollars for Groupon, and they said no. And for a moment, everyone thought discounting had been solved, but then reality actually arrived, and therein lies the problem. And I think that's probably one of the reasons why we've got you here today, Kira, from an Indian heritage. You're pretty good at discounting and bargaining. Because I thought you'd be the perfect person for this particular podcast, right? That's why you chose that's why that's why I chose you, mate.

SPEAKER_02 3:03

So I can't see my head shaking.

SPEAKER_00 3:05

But I can't see you bartering under the table with me, mate. So that's a problem. But look, there is a great divide, and there's one of the reasons why Groupon actually stopped winning. And this is what we really wanted to try and sort of break down today because this is where the story gets absolutely fascinating. Most people think Group One competes with Scopon or Kudo or one of these other discounting companies that are out there. They're actually wrong. The competitors change. Groupon stayed with coupons, everyone else built an ecosystem. And let's actually compare it. Groupon itself, it's a marketplace, it's beauty, it's restaurants, it's travel, it's activities, and it has huge global awareness. Over 200 million apps downloads. But the Australian product review, it's only 1.8 stars. Trustpilot, 3.8. The traffic is obviously strong. The trust is sort of there, but it's pretty fragile. And now it's really a time to really understand the competitors out there. So here's the floor, mate. Over to you, Karen.

SPEAKER_02 4:06

Well, now compare that with Big Red Group. Red Balloon, Adrenaline, Experience Salles. Over 50 million annual visitors. That's nuts well. More than 3,000 operators and over 10 million experiences delivered. Notice something. They're not selling discounts, they're selling memories.

SPEAKER_00 4:25

Yeah, memories are important because it's all about the emotions, right? That's a really good point because there are other competitors out there as well, such as Luxury Escape. And they took another path. Nine million members travel, hotels, flights, cruises, experience, 24-hour customer support. And no one buys luxury escapes because it's cheap. They're buying it because of the trust, and that's really the difference. And there's a quick sidebar. When a business competes on price, there's others that compete on confidence, and that's a much stronger position. Before we continue, a quick word from today's sponsor, Eventumoptium. Business is tough enough, and you don't need to deal with debt on your own. Eventumoptium is the Latin phrase for the best result. And that's exactly what their team is focused on delivering. The best result for business owners. Whether it's asset protection, credit pressure, business earlier, restructuring, or pre-insolvency advisory, their team works with directors to create practical solutions before the problem becomes a crisis. Because the best time to solve a business problem is before it becomes a pickle. To learn more, visit Eventum Optim.

SPEAKER_02 5:43

But here's where the wheels fall off. Let's use a simple example. Customers buy a hundred dollar service, receive a 40% discount, which means they pay 60 bucks. The platform keeps roughly about 31.7%. Merchant ends up around $41 before wages, rent, consumables, and all the else. That only works if your margins are high, your capacity is idle, and customers come back at the free price. Otherwise, you're paying to stay a basic really.

SPEAKER_00 6:16

That's right. So what do we what do we score it? So something that we do in this particular podcast is that we score each section of the moat strategy, margin operation, advantage, and total addressable market. We've just done margin, but the margins seem like they're pretty tight. And if we are to score it out of 10, and I know with especially with a lot of the customers that you deal with as well, mate. I mean, you know, especially in the hospitality industry, margins are pretty tight, extremely tight. And if you've got another platform such as Groupon, for example, your margins are either going to be worse. So I've probably loaded up the question, but what do you score at out of 10, Carol?

SPEAKER_02 6:58

I would say around the five is five and a half at best.

SPEAKER_00 7:00

Yeah, yeah, but halfway. I'm sort of at a bit of a disagreement because I know where a lot of the margins themselves, especially with a lot of the businesses in the space that we're in, like we're in the insolvency space. And one of the reasons why a lot of those businesses get themselves into the predicament that they do is that the margins are not high enough. The business model already is struggling to begin with. And if you add a platform on top of this, when it's going to make life even harder. I'm not seeing great margins here. I'm actually going to score it probably a two. I might disagree with you there. So, Kieran, five and a two for me. Oh, for operation. Now, marketplaces and businesses look simple, but they're actually not. And you need merchants, you need customers, you need payments, you need fraud refunds, all that fun stuff, customer support, you know, that comes at a cost just within itself, especially with you know a labor-intensive business. But when everything works, customers do actually love it. And when one thing breaks, everyone blames the platform. So for me, this type of operation just sounds really complicated and it seems to be skewered towards the actual platform and not the actual merchant themselves. So when it comes to operation, I think it's a great business if you're the platform. You can certainly systemize the actual platform, and you can add a lot of technology to make your life a little bit easier. So I think this type of business seems to be skewered towards the platform. What's your thoughts when it comes to operation, Sharon?

SPEAKER_02 8:34

I mean, the only thought process you could have is we know that when there's volume, the operation really has to juggle on. I would actually give it a fairly decent rating based on that, because of the simple fact the model or the platform gives you the volume you need to basically hit certain thresholds in terms of capacities.

SPEAKER_00 8:52

And they're dealing with small margins, but if you have it at scale, then the platforms obviously succeed.

SPEAKER_02 8:57

Actually, it works better when there's volume. Politically as well, it works when there's volume. Because I would give it somewhere around a four and a half five.

SPEAKER_00 9:04

I think I agree with you in this particular instance. So four and a half for you. I'm probably just gonna score it a four, because I think I'm gonna score it a little bit high, actually. I might take that back because a successful platform operator such as Groupon, their operations, they're actually down pat. And so they're able to operate at scale. Because I mean Google's not gonna be offering them six billion dollars if their operations wasn't at scale and wasn't on point. So I think you know, for this particular business for operations, they've done exceptionally well, and to also to be able to operate at a global scale as well. It's fantastic. So I think their operations is fantastic. So I'm gonna take my full back, I'm gonna give it a six. So we can swap and change. If you feel that's not the right score, we just take it back. All right, over to you for advantage, mate. Okay, the advantage part. I love this piece actually, because this is actually why because you like discounting.

SPEAKER_02 9:57

No, this is this and when you come to the advantage piece, yeah. We're looking at discounts really aren't anyone can discount, and we've seen that we push everyone for a discount. But guess what? Trust is really where the advantage is. Brand is the model, luxury escapes, build trust. Correct. Big red balloon built an ecosystem, group on built coupons, and guess which strategy compiles.

SPEAKER_00 10:23

Yeah, that's right. It's the platforms, it's the platforms that compound.

SPEAKER_02 10:27

I totally agree with that. I'd actually give it a fairly good rating on that part because I think the advantage they bring to the discussion to the consumers.

SPEAKER_00 10:35

There's a massive advantage that they bring to the consumers.

SPEAKER_02 10:38

Absolutely. And you know, I think when you've got that trust factor, I mean today, what people might laugh at team, yeah, but the fact that they've got that volume of the stuff. Yeah, true. I was speaking to the guy the other day about storage, and I said, you know, I think storage the first thing going is to team, yeah, you might get some crap, then you probably look for a more expensive product. That's where the advantage is, isn't it? So trust is so important.

SPEAKER_00 10:59

We cannot share price goes up. But you know, like you've got an old industry like that, storage, all of a sudden they're running out of space, and so now they're scaling their portfolio. And because we're as consumers, we're consuming more, storage has become an issue.

SPEAKER_02 11:16

Yeah, I mean, we've got the other side in property. People are moving away from a big house and moving into an apartment, and they get this little bloody cage, it's just it's like a prison sale. Yeah, you've got to store your entire you know, five-bedroom house now in straight. Right.

SPEAKER_00 11:29

We did exactly the same thing. We downsize, it's a nicer unit. Absolutely. It's a beautiful unit, it's a beautiful top floor unit, but the reality is that we're like, where do we put all the stuff? There's no storage.

SPEAKER_02 11:38

And I think we are at that generational gap now, and we're kind of coming to see the importance of attention. You're one of those people I find immense amount of attention on subject at hand. The last thing you want to be doing is freaking mowing your lawn on a Saturday.

SPEAKER_00 11:53

That's exactly right. Well, you see me here at the office. I don't want to. Me personally, I want to be able to sort of simplify what I do, especially on a weekly basis, and also on the weekends. So if I can eliminate the the mowing and the edging and all the rest of it, I can focus on the jobs at hand, but that's just me, not everyone, not everyone's the same.

SPEAKER_02 12:10

So I think that advantage piece really sits really importantly for this particular business model because on one side you can see, you know, there's volume, but then it comes down to the trust factor and not those smaller investment pieces.

SPEAKER_00 12:22

Yeah, it's the economies of scale. Absolutely, absolutely, yeah. And so they've got a huge advantage, they've got a huge trust factor. The customers love them, they're able to scale. It's very, very difficult to overcome that advantage. And as you just mentioned, so it's a really good point because it's the strategy that compounds, and and they're known for one thing, group on and group on is coupons, and so they have the advantage based on their branding. You're new to this podcast, but you know that you you know me personally, so you know I like my branding. And so, does the brand represent what the business actually does?

SPEAKER_02 12:54

I think so.

SPEAKER_00 12:55

And with group on, they do coupons, so they've got the advantage, and that's a very competitive mode just within itself. Yeah, so they've definitely got the advantage. What do you score it? I think we've again, I think we've already just. How about you go with a six on this one? You have six with this one, yeah. Six, definitely, definitely a six.

SPEAKER_01 13:13

I wanted to explain Tam in a little more detail so that everybody understands what you need.

SPEAKER_00 13:18

Yeah, so TAM, which is the total addressable market, and look, it's a huge addressable market because you're talking about discounting and coupons globally. We're similar vintage. You know, remember the coupons back in the day when the kids and you know, mummy's ripped out those coupons, like they've digitalized groupons.

SPEAKER_02 13:36

Yeah, I think I think remember, I remember where you'd see this on the back of a woolly's uh receipt. Yeah, yeah, and you just lost a waste of paper, you just you dump it in the pin fool.

SPEAKER_00 13:47

Or the greenies, I don't know what I know because you're wasting paper, just go on the internet, just yeah, just go on a group on.

SPEAKER_02 13:53

Yeah, but we brownies basically we love the discount.

SPEAKER_00 13:59

You've still got five cents that you save from when you're a kid.

SPEAKER_02 14:03

The thing is this the thing is that the attractiveness of just possibly getting something even a cent cheaper, yeah, doesn't allow the mind to make that decision when somebody else has spent all of that time getting you to the site, getting you to the to the to the buying page, putting your credit card in before you hit that click, you say, let me just check what something else.

SPEAKER_00 14:25

Yeah, yeah, that's right. That's right. You want to you want to compare the prices.

SPEAKER_02 14:28

And the worst feeling is when you get onto a flight, onto a cruise, and the person next to us has got a group on, and it's like, oh, I got I got on this one.

SPEAKER_00 14:35

That's right. You got you paid full price. There's nothing worse. That's exactly right. No, well, it's a massive tab, and they've been able to scale globally for obvious reasons because everybody loves a discount, everybody loves a coupon, and consumers will always chase value, which is what we're saying. They're not changing. I mean, consumer behavior doesn't change, everyone loves a discount. And so the opportunity, it isn't daily deals, it's experience, it's travel, it's loyalty, it's the membership, it's the gifting. You know, you can pass on that gift. And obviously, it's like what discovery. I mean that's why Airbnb is so popular because it's it's discovery. And then you're able to do that at scale.

SPEAKER_02 15:14

And I think with with some of these, because you you start to frequent them so often, you know, you just get into a habit, you know, exactly where the buttons are. Of course. You know, I think the size of the market these days that's looking for that level of idiot ring. I don't want to think anymore.

SPEAKER_01 15:30

No, yeah. I know what I want to do. Simplify.

SPEAKER_02 15:32

I mean, there was a time you would walk into a shop. I know this for a fact. I mean, when we migrate and come in from different countries, yeah, we've got maybe five, six, seven hundred thousand miles between us if we're all. So we've got a lot of distance from what you've migrated to, but try moving us from one suburb to the next. The only reason is because when you walk into your shopping center, what's on the aisle is different. It just is, and you start looking at that and saying, you know, in certain areas of your life, yeah, you just want that simple consistency, so the brain doesn't have to do the hard work. That's right. You know, so I just think with a lot of these things, you know, just the comfortability, the number of people in the market who want that today has grown. We've we've moved out of that very lower-end conscious yeah, I've got to search and fight for everything. Yeah, you know, third world problems are, you know, where do can I park my car in the visitor spot?

SPEAKER_00 16:23

You know, because like we we live in a world where when we were kids, we had to wait for the series to come out next week. If the episode finished, you had to wait a week. Absolutely. Now everything's on demand, absolutely, and so our kids have grown up that way because everything's on demand, and it's also our consumer behavior as well because it's on demand. We know that we can get it straight away. So consumer behavior has definitely changed, and this accessibility to be able to purchase things has given a lot of consumers that ability to be able to click and buy, which is the Amazon effect, right?

SPEAKER_02 16:59

Absolutely, and the market that sits up with accessibility to the internet today. I mean, it's a non-conversation, isn't it? But when you actually think about it, it's such an important factor to things like this actually taking off and going someplace. Yeah, because if you look back 15 or 20 years ago, you know, there were there were black holes where there was no access.

SPEAKER_00 17:18

There was a time there where people used to think that the internet was never gonna work and no one's ever gonna put their credit card on the internet. Look where we are now.

SPEAKER_02 17:24

The other day I was sitting in a conference and this girl got coached just on one simple factor. Said your trust depletes every time your Zoom call glitches.

SPEAKER_00 17:34

Yeah, really.

SPEAKER_02 17:34

Yeah, so she said, listen, my next option is how to go and get this thing to the satellite. I don't know, I don't want to promote any practice there, but I was shocked. I said, you know, we're even talking in a place that has NBN available in a city like Sydney. Yeah, you're talking about actually going through a satellite interconnected again, you know.

SPEAKER_00 17:50

So well, look what happened with Toster last week. We probably should get satellite. So what do we score the TAM? Obviously, it's a massive TAM.

SPEAKER_02 17:59

I would hit it closer to the seven and a half eighth mark. I'm sitting comfortable with like seven and a half.

SPEAKER_00 18:04

Seven and a half, seven and a half, yeah. I agree, it's a massive temp. So I'm gonna go eight. It is an absolute massive tem. So the moat scorecard is where we tally it up. What do we score at? So for margin, Kirana was a five for you and a two for me.

SPEAKER_01 18:24

Yep.

SPEAKER_00 18:25

For operations, it was a four and a half for you and a six for me.

SPEAKER_01 18:29

Yep.

SPEAKER_00 18:30

Advantage, six for you, and a also a six for me. So we're at a greens there, mate, for the advantage. But that's great. You already want to discount off the percentage. 10, which is seven and a half for eight and eight for me. So that's twenty-four for you, and that's twenty-three. Not bad. There you go.

SPEAKER_01 18:53

Not bad.

SPEAKER_00 18:54

It's a big one. We're over. Yeah. So out of eighty.

SPEAKER_02 18:57

Was that out of eighty?

SPEAKER_00 18:58

Yeah, it's out of eighty.

SPEAKER_02 18:59

Wow, wow.

SPEAKER_00 18:59

Yeah, so we're over. So the next part of the segment, the million dollar test. Well, this is pretty obvious. Obviously, the business can generate over a million dollars in revenue, but we do like to break down particular platforms and the reason why platforms do as well as what they do. So, what can you tell us about platforms, Kira?

SPEAKER_02 19:19

So, can a group on style platform generate a million dollars in revenue? Yes, but not because the maths is easier, because the distribution is already built. But the research estimates an incumbent platform needs roughly 117 vouchers sales per day to reach about a million annual platform revenue. Let me just let me just go through that again because that's a significant number. So, uh what the research is telling us is you need 117 voucher sales per day to reach a million dollars in annual platform revenue. Man, that's the big market.

SPEAKER_00 19:53

That's what we talked about before, the economies of scale. That's a lot of vouchers.

SPEAKER_02 19:56

And when you think about it for a startup, the traffic, the merchants, the consumer trust, the consumer support payment systems at the same time, that's where the marketplace among the hardest businesses to build. You're trying to pull all these things together.

SPEAKER_00 20:08

Yeah, but the complexity of it too. I mean, getting all the retailers to be able to accept the discount offering, and then know that they're going to get people in the door, and you're hoping that the experience is good enough because you know you're gonna take a hit on the first sale because you've actually sold it through Groupon, and you're praying that they come back so you can actually make money off at the back end.

SPEAKER_02 20:26

Now, the interesting part in this is I've seen the amount of upfront, not just capital, but intent you need to have because one of the four or five people who started up the build payment system in India had a very similar kind of portal system.

SPEAKER_01 20:40

Yeah, I remember that.

SPEAKER_02 20:45

On the other side, you had to go out and grab the clients. You had to build this entire system, this ecosystem. And it requires a lot of really hard core intent because I remember the largest database in the world, an insurance company, took over 18 months to sign on. So, how do you hold on to a team? How do you support that? That's right. But fortunately, this was one of the largest financial institutions in that market. And that's what sometimes you're looking for. What is the depth behind this?

SPEAKER_00 21:14

Yeah, and what's going to be the burn until you actually start generating a profit. The burn rates are just extraordinary for these types of platforms.

SPEAKER_02 21:20

And for even a BC to pick this up, I mean, how deep are their pockets? Exactly. You know, 25% stake. You're not looking at something that's you know as significant as holding off for two years before you see your first your first dollar come through, and that's not even a full dollar example.

SPEAKER_00 21:35

That's exactly right. So your burn rate's going to be extraordinary for the first couple of years to be able to build brand awareness and that trust and things all that. So it's a difficult business to get into.

SPEAKER_02 21:43

So I would also then look on the other side of somebody coming in and putting the product on. They also, you know, how is this going to work? Is it not going to work?

SPEAKER_00 21:51

Yeah, absolutely. And so, I mean, I I suppose then it's an interesting point because this episode actually changed my thinking. I mean, the real winner is obviously. Obviously, Groupon. And the winners were businesses that have actually learnt from companies like Groupon. I mean, they've always asked, What actually is a discount? And is the feature much bigger than the actual ecosystem? The exact thing, like, especially when it comes to the big red group, what did luxury escapes actually do? Why was it harder for them to compete today if they were to enter into the market? I mean, it's that longevity of the brand that they've built up, that intellectual brand awareness over a long period of time. It's that brand equity, which I think is really what it's come back down in this particular podcast, which is something that really sort of stands out for me. It has a lot to do with brand equity. So is group discounting a good business? Is it a standalone company? No, not really. It really needs to be a part of a broader ecosystem. And I think that's the key.

SPEAKER_02 22:50

Just look at the fact that we even know the name of Tmu today. All right, yeah. It's just it's just like and I see that discounting as like absolutely nuts. I mean they they annoy you. Annoy. You're trying to try nuts.

SPEAKER_00 23:03

That spinny bloody wheel thing that's like that drives me. Like, well, I've I've never done it. I and and I I know I you click onto it, and then as soon as that wheel comes on, like I'm out. You can't gamify e-commerce. I mean and they have, but they've done that. Absolutely.

SPEAKER_02 23:16

And the fun part is while you and I can bitch about it nearly every house you walk into these days, you can virtually pick a whole host of TMU products kind of.

SPEAKER_00 23:24

Yeah, 100%. You know, 100%. It's fast fashion. But we live in a throwaway society, and that's the problem.

SPEAKER_02 23:29

I live in a unit block, and every time I go to pick up my car, I drive past this place in which people have dumped their stuff that they probably bought last night. Yeah, it's a throwaway society. It's nuts because you're just saying we've got the greens shouting about you know how much more landfill are we going towards?

SPEAKER_00 23:42

Yeah. But on the other side. Meanwhile, we're purchasing what there's atomora. Absolutely. Yeah. So what's the verdict? The good, bad business verdict. When it comes to it being a good business, it is an experience ecosystem. It's travel platforms, it's loyalty programs, it's membership, and discounts, they fill spare capacity, which is what you just mentioned with the T-Mail analogy. Is it a bad business? Generic deals, platforms, I mean, there's a lot of them out there. Merchants rely on consistent discounting, and businesses without repeat customers, it becomes pretty difficult. So, what is the appical risk? Thin merchant margins, high customer acquisition cost, weak support, need an ecosystem, and no repeat behaviour. So the final verdict discounts don't build great businesses. Great businesses use discounts strategically to be able to get the people into the actual door. And that's the difference between building a moat and getting into a pickle. Durant, it was a pleasure to have you on the podcast today, and hopefully we can do many more.

SPEAKER_02 24:45

That was really exciting. Thank you so much.

SPEAKER_00 24:47

Well, a pleasure, mate.