Can you copy a business model? Groupon and its clones

April 14th, 2011 by Patrick Stähler

Particularly on the web, we see a lot of copies of successful business models. How many clones are there of Groupon? How many competitors and incumbents wanted to copy Amazon in the late 1990s and failed? The core question is: Is it possible to copy a business model? In this post, I will elaborate on this topic.

Business Model Copycats

During a recent interview for a bachelor thesis, I was asked: Under which circumstances is the transfer of a business model e.g. from a different country or from a competitor a useful strategy?

I must admit, I am skeptical about the outright transfer of business models from one firm to another. The reason is very simple. A business model is more than its technical components like your value chain, revenue model, your product etc. The business model also includes soft factors like the value proposition, your values and corporate culture or your core competencies. Remember the definition of core competency: core competencies have to be rare, difficult to copy and valuable.

Many strategists, VCs and purely analytical people think that it is easy to copy a business model. What they forget is that a business model is not just a technocratic combination of components, in fact, humans are involved with their values, cultures and hidden assumptions. You can copy the hard components, but the human aspect of a business model –values, culture, tacit knowledge – is difficult to copy.

Business Model transfer from Start-ups to Start-ups

The case is different for startups where the human aspect is not as developed as in more mature firms. To copy a business model that is not based on technology is easy. To copy a business model of a startup, whose uniqueness is based on proprietary technology is difficult.

Case: Business Model Innovation Groupon and its clones

Logo GrouponAn interesting case is Groupon and all its clones. Groupon is a deal-of-the-day website which allows consumers to shop for certain services or products for a large discount when a  sufficient number of users sign up for the deal within a short window of time. The value proposition for the user is simple: Get great deals for a hefty discount.

The value proposition for the businesses that offer the deals is less obvious. Why would businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business. Traditionally, this task “lead-generation” was offered by the Yellow Pages, classifieds or more recently, by Google Adwords. Now, there is a new way to achieve this task: a typical business model innovation.

The value proposition for the businesses that offer the deals is less obvious. Why do businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business (job-to-be-done by Groupon). Traditionally, the job “lead-generation” was offered by yellow pages, classified advertising or more recently by Google Adwords. Now, there is a new way how to solve this job: a typical business model innovation.

The traditional methods of “lead-generation” require the business to pay upfront without knowing what revenues would be generated. At the same time, businesses might be reaching people who are not interested in their goods and services. Google Adwords is already innovative. You only have to pay Google if a user is interested in your ad and clicks on it. So your ad is already much more targeted.

Groupon goes even a step further. With the Groupon model, the business targets and reaches only users that are willing to pay for their products and services, at, of course, a steep discount. Groupon’s value proposition is particularly well-suited for businesses that have a high contribution margin for every customer they serve. This is the case for beauty salons or massage parlors. Every customer via Groupon brings in business. That is quite an innovation in the “lead-generation” business where you usually pay money to get leads. With Groupon, you get leads and get business at less than 50% of the normal price.

The value proposition sounds very convincing but the big question for businesses is if they can transform Groupon users into regular clients who pay regular prices or if you just get one-time discount hunters.

Groupon’s History and its clones

Groupon started business in 2008 and rose to the attention of other entrepreneurs worldwide in 2009. In 2010, Forbes counted over 500 clones worldwide, with more than 100 such firms in the US alone.

In Germany, CityDeal rose to prominence when the Samwer brothers (well-know cloners of US internet business models) went from zero to 700 employees in half a year and then sold the firm to Groupon. This is a typical revenue model for investors of some copycats. Instead of earning money with its customers, the basic idea is to be acquired by the originator of a business innovation during their internationalization spree. For the Samwar brothers it already worked twice: First with their eBay clone and now with Citydeal. [update March 2nd, 2012 Business Week writes about the Samwar brothers and their management & investment style. Definitely worth reading. You will not like the guys more after reading the article.]

Other clones focused on smaller markets that are less attractive than the big markets. E.g. DeinDeal works successfully in Switzerland.

Summary on startup business models

Yes, you can copy a business model from one market to another if the value proposition is also attractive to customers in other countries. If the business model is protected by core competencies or patents you cannot transfer the business model easily.

Business Model Transfer from Startups to Incumbents: Can they dance?

To take the Groupon case further, why did we not see copycats from firms that are already in the “lead generation” business like the Yellow Pages. These companies already have one of the core assets for the Groupon business model: Local sales teams for SMEs. So it would be easy for them to build successful clones.

 

But they didn’t. Why?

One reason is that they did not define their business by lead generation for SMEs, the job they solve for their customers. If you define your business by the product or around the value proposition for your users like local search, you do not see the threat your business models faces by Groupon. You believe you are in the search [] business but, actually, Groupon competes for the same bucks that you do. It is good that Groupon and all its clones [] are not taken serious, at least in the beginning.

So in the case of incumbents, the human aspect in their business model is the limiting factor to transfer the startup business model.

Amazon vs. Barnes & Nobels vs. BOL vs. Otto-Versand

Another great example is Amazon. Amazon was very easy to copy in the late 1990s. It was just an online book reseller. That is easy to copy. The incumbents were [] well aware of Amazon early on. They waited to see if Amazon could prove the business case of online book selling. When the incumbents saw that the take-up rate of online book shops was great, they responded with clones. Barnes & Nobel, an innovator in stationary book selling, entered the market, as did Bertelsmann in Germany with BOL. Were they successful?

The German Defense Secretary Mr. Guttemberg had to resign due to paste and copy activities in his Ph.D. thesis. A warning: Copy and paste can harm your future ;-)

Well, not really. Although they ventured into online book selling, the human factor in their traditional business model impeded success in their new venture. The incumbents always had the problem of cannibalization threatening the existing business that they wanted to protect. So the move into online book selling was seen as a defensive move. It was halfhearted. Meanwhile, Amazon was fully committed to being online; they had no other business.

And why did Otto, the largest mail order house in Europe, not react? Or the now defunct QuelleKarstadt? Again, it was the human factor of their traditional business model. If you are the king of the mail order business why should you be afraid of an online book seller like Amazon? In hindsight, Amazon is more than books, but the label “books” still sticks to Amazon. The incumbents in mail order never thought it would be possible for a newbie to build an infrastructure of warehouses and support systems they had until Amazon did it [] even better. The same is true for IBM or HP. Amazon is a big player in cloud computing, not the incumbents.

Summary

Incumbents can easily copy business models from startups. But often they do it only halfheartedly in order to protect their current business model. Here, the human factor on the side of the traditional business is the impediment for the successful transfer of a business model from one firm to another.

Business Model Transfer from mature firms

So what about transferring business models of successful, mature companies? Why do we not see more IKEA clones?

Here, yet another factor plays against the clones. The longer a company works under a successful business model, the more difficult it is to beat that company on their own turf. They have learned so much from their customers, they have gained so much tacit knowledge in how they run the firm that it is difficult to copy the business model. This is particularly true when the business model is based on a strong value proposition for customers and partners – like suppliers.

The Geberit case: a Business Model Innovation in the building industry

Geberit is a Swiss firm involved in plumbing and maintenance. Quite a commodity business, you might think. That is true if you think that you sell plastic pipes and other products. But they have developed a business model innovation. They do not sell pipes or other products but they sell you smooth and easy bathroom renovation and building. That is quite a different value proposition. So they have developed a system where everything is pre-assembled in a behind-the-wall system.

Of course, you can copy the installation systems of Geberit. There are just products. But what you cannot copy is the relationship Geberit has developed with its key partners, plumbing professionals. 30.000 professionals are trained every year on Geberit technology; these professionals plan their client projects with software from Geberit; they have been working successfully with Geberit products for years. In fact, the sanitary professionals know only Geberit nowadays.

So, Geberit is not just a product innovator but a business model innovator. It generated a lock-in with the most important influencer, the plumbing professionals. Geberit has developed a great value proposition for and some core compentencies around its partners like partner management or knowledge management.

Summary

To copy a business model of a well entrenched and successful business innovator is very difficult. The innovator has developed so many competencies and so much tacit knowhow that it is almost impossible to copy the business model. Of course, you can transfer the business model to other countries, but remember it will take time for you to build up knowledge and it also takes time to develop customers for a fresh business model. Customers do not adopt innovation quickly as they also have to learn new things about this innovation.

Summary: Transfer and Portability of business models

Today, we have much discussion going on about copying and transferring successful business models. What sounds so easy in theory and from consultants, is much more difficult to implement. A good business model is by definition difficult to copy. A good business model is not defended by patents or high-tech but by the excellent interaction of all its components and, particularly, by the human factor.

15 Responses to “Can you copy a business model? Groupon and its clones”

  1. groupon etc. Says:

    Can you copy a business model?
    Yes you can! The most important point however is, that you don’t only copy it, but that you improve it and implement it better.

    Recommended reading:
    Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge
    http://www.amazon.com/Copycats-Smart-Companies-Imitation-Strategic/dp/1422126730

  2. Patrick Stähler Says:

    @Groupon etc., would be great if you share your experience with us on this issue. Best regards Patrick

  3. Business Strategy Says:

    Very interesting! I didn’t know about the CityDeal to Groupon connection

  4. Erwin Says:

    Interesting topic, good analysis. Maybe one consideration to add, e.g. lots of successful business models are not the first movers, e.g. Ebay was not the first with its service (as far as I am correct).

    So we may want to differentiate between a first period that the model is new and the first mover is not yet very successful and experienced. Then there is the option of first mover disadvantage and someone could copy & paste and take over, when they do not have other constraints (e.g. next to human factors also path dependency, organizational inertia, dominant logic, etc.).

  5. Erwin Says:

    BTW Patick, what is your view on Google (‘Offers’) and Facebook (‘Deals’) copying Groupon?

    See also http://bits.blogs.nytimes.com/2011/04/25/facebook-is-latest-rival-to-groupon-livingsocial-facebook/

  6. Patrick Stähler Says:

    @Erwin, you are absolutely right with the first mover. I call it the right mover advantage. And right means two things: the right time and the right moves.
    When I worked on my Ph.D. in the end of the 1990s we had ideas and tried to implement them like ecommunity (now called facebook) or a NetAcademy with a dictionary for special fields of interest (now wikipedia.) Facebook and Wikipedia were not the first but they implemented the idea greatly and got the social momentum to start the community.

    The same with Alex on the business model. He was not first, but he was great to take the input of others and then market it better. And his timing was great.

    When I wrote my thesis on business model innovation in 2001, I was too early for the majority. My supervisor Georg von Krogh, a renown professor of strategy, said that the thesis it one of the most innovative he has every read but the work is outside of academia mainstream and therefore almost impossible to publish in academic journals.

    Well, it took academia almost 10 years to get a special issue on business models http://blog.business-model-innovation.com/2010/07/business-models-long-range-planning-baden-fuller-and-latency/ And here again, the Baden Fullers will be cited for being so “innovative” ;-).

  7. Patrick Stähler Says:

    @Erwin, here’s a separate answer to your second comment. I do know to little about the details of Google Offers and Facebooks Deals. But one thing is clear. We see a fresh competition which will be the dominant design for “lead generation”. Google, facebook and groupon are the new kids on the block and by now we can not say who will develop the future dominant business model to solve the job of lead generation. In the past, it was the Yellow Pages business model but the future is not yet decided.

  8. What business are you in? Business models as social constructs | Business Model Innovation Says:

    […] suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating […]

  9. eee Says:

    Groupon has patented its business model: Search ‘groupon’ @ http://www.epo.org/

    How does this effect copycats? Will Groupon sue all of them: http://www.mainstreet.com/print/20236

    How would one successfully copy a business model without being sued?

    BR, N.

  10. Top 10 in 2011 on business model innovation | Business Model Innovation Says:

    […] Can you copy a business model? Groupon and its clones (4/2011) […]

  11. Get Yourself A New Model « It's Not About The Money Says:

    […] exactly the same when you are growing a business. Even in the unlikely event that your enterprise replicates another identically, it is highly improbable that it will follow the same path or pattern of growth. One thing you can […]

  12. Thiago Paiva Says:

    If you can copy a business model? Yes, you can! But in fact it’s very difficult to be successful with that. If you’re a startup it’s easier to copy, but large companies can copy by creating spin-offs (althought this isn’t very commun).

    But just to show you an example of a successful copycat, here in Brazil we have a Groupon copycat, Peixe Urbano, that is bigger than Groupon in Brazil and that is looking forward to be make an IPO.

  13. Deals Groupon etc Says:

    There ist no reason to find a new business model if you can go for a “me too” strategy. Do it better an you’ll rule the world 😉

  14. Lis Says:

    Hey there,
    pretty interested in this Topic; – could you recommend any supporting literature?

    Best regards

    Lisa

  15. Patrick Says:

    Dear Lisa

    I do not have too much literature on copying a business model. The point is that business model innovation have a superior return due to larger barriers to copy since the business is more than just product or process innovation that are simple to copy. The business model is the impediment against copy cats. Here a paper from BCG on superior returns of Business Model Innovation. http://www.bcg.com/documents/file36456.pdf

    Best regards

    Patrick

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