Groupon Rewards to the Rescue – Can the company’s loyalty program resuscitate the ailing stock?

Just a few short years ago, the prospect of owning stock in “daily deals” site Groupon would have had many investors running for their checkbooks. But less than a year after its IPO, which valued the company at $13 billion, the enthusiasm has all but disappeared. As of August, more than half of the firm’s IPO value has vaporized.

Investors rightly wonder whether Groupon’s model was fit for the long-term; and Groupon has rightly responded by attempting to expand its revenue base. One such effort, announced in May, is Groupon Rewards. Unfortunately, the details of the plan offer little hope that Rewards will be to Groupon what the iPod was to Apple.

Groupon Rewards is straightforward. A small business signs up for the free service and creates a plan that rewards frequent customers. Rather than the typical “buy-10-coffees-get-one-free” promotion, which typically involves the use of annoying punch-cards, a Groupon shopper links their credit card to their Groupon Rewards account. Any activity on the card at a participating merchant is credited to the shopper’s account, allowing the business owners to gain better insight into their customer base and, of course, engender loyalty.

It all sounds great in theory, but the plan suffers from some fatal flaws. In truth, the biggest flaw is less about the Rewards program than about the company in general. That’s because rewards does very little, if anything, to give Groupon a significant competitive advantage, the one thing that with help protect the company from competitors like Living Social.

That’s partly because it isn’t difficult for a competitor to replicate the Groupon strategy and undercut them on pricing. It’s also due to the plan’s particulars — to sign up, Groupon’s customers need to “opt-in.” That requires users to allow Groupon to track its spending on a specific credit card, something that many consumers — whether out of privacy and security concerns, or just general laziness — are unlikely to do in game-changing numbers.

And the number of users is critical to the program’s success. Merchants and consumers pay nothing for the service; Groupon gets a commission on any rewards that are cashed in. In other words, broad adoption, and not simply having a presence in a range of local stores, is what will impact the Groupon’s bottom line.

To be sure, Groupon is still a powerful force in the daily deals market. It has 37 million users and, as a public company, has done a decent job at cutting the costs of its marketing programs and other overhead. It wants to be a ubiquitous presence in local commerce, and is among the firms best positioned to do so. But it’s hard to escape one simple fact — today anyone with deep pockets can join the deals market, too. Until the company finds a way to erect solid barriers to entry, investors will be hard-pressed to include Groupon in a long-term, buy-and-hold portfolio.