Wharton professors cite flaws in Groupon business model

In March 2011, Wharton and College juniors Jonathon Youshaei and Mimoun Cadosch Delmar started Crowdquest — a Groupon-style service designed for the Penn community. However, according to their website, their business venture hasn’t posted a deal at Penn this academic year.

Insight from professors in the Wharton School may reveal problems in the structure of coupon-sharing websites like Groupon and Crowdquest. Operations and Information Management professor Eric Clemons believes these services are flawed conceptually.

“I don’t think it is successful, I don’t think it should be successful, and I don’t think it will be successful, unless it embraces a fundamentally different business model,” Clemons, who co-authored an article last year that warned businesses about possible dangers related to Groupon, wrote in an email.

Wharton professor of Information and Operations Management Kartik Hosanagar explained that companies like Groupon are designed to benefit all parties. In theory, he wrote in an email, consumers are able to save money, while merchants can attract new customers — with the website that connects the two getting a percentage of the overall profits.

Marketing professor David Bell added that “in theory, [websites like Groupon are] supposed to give you access to … something you haven’t found on your own.” Though Bell agreed that Groupon’s business model does have some flaws, he thinks it is generally a good idea.

Youshaei wrote in an email that while no new deals have been posted at Penn, the website has secured seven deals at its Yale branch this semester. He added that they are “currently working on pivoting the site in a different direction, but have gotten significant traction with our current mode.”

Some students have benefited from the model. For College sophomore Manusnan Suriyalaksh, who uses Groupon to search for vacation packages, the service has resulted in a discounted trip to Costa Rica for spring break in 2012.

Like Suriyalaksh, College sophomore Stephen Smilowitz checks Groupon regularly. However, he primarily uses Groupon to search out deals at good restaurants that he wouldn’t have found otherwise. He added that he enjoys using the service.

Others, though, feel Groupon presents more drawbacks than it does advantages.

For Clemons, companies like Groupon and Crowdquest do not create new customers, but rather shift them away from other businesses.

“This can’t go on forever,” he wrote in his article.

Bell added that the service is often ineffective in creating loyal customers.

“The biggest breakdown is that those initial purchases … rarely translate to ongoing business for the merchant,” he said.

Groupon “trains customers to buy on deals,” Bell explained. Instead of creating customer loyalty, Groupon may create customers who simply look for deals.

College sophomore Kyle Toomey said he doesn’t use online coupon websites because they are too time-consuming.

“I don’t feel like I need to check it every day or actually use it,” College sophomore Panarat Anamwat added.

Earlier this year, Groupon began testing “Groupon Now,” a new mechanism that offers deals in real-time. This new type of deal could allow Groupon to evolve and avoid possible problems, Bell said.

“It’s a big way out for the merchants,” he explained.

Regardless of competing views on the business model, many agree that companies like Groupon have changed the way consumers shop.

“People question it,” Hosanagar wrote, “but the fact is that consumers love a deal and businesses are willing to spend to acquire new customers.”

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