Groupon was having an exponential growth for over a year now, traffic to the site has grown 6 folds from July 2010 to June 2011, and the website has reached a US ranking of 22 (meaning that it was the 22^nd most visited website in the US, which is very impressive for a website that is only a couple of years old). But all that traffic came at a very steep price: Groupon burned a ridiculous amount of money to acquire new customers, thinking that they have a zero percent churn rate and that their retention rate is infinity. Obviously, they were wrong.

As you have probably noticed, Groupon has reduced its advertising budget, substantially it seems, and that action has reflected immediately on its traffic. Take a look:

As you can see from the above graph, the traffic immediately decreased once Groupon reduced its advertising budget. But the thing is, Groupon had no other choice, it was costing them so much to acquire new customers and they were losing money like crazy. They need to prove to their main investors that they can be cash flow positive, but the problem is they know that they’re just buying time before the Ponzi scheme is called.

You see, Groupon discovered that their business model doesn’t work. Their customers are not loyal as they thought they were, and they can leave them for a better alternative, as soon as a better alternative is available (don’t forget, there are nearly a 100 Groupon clones at this very moment). Not only that, that better alternative might be Facebook or a Facebook application. Since everyone’s is on Facebook, why do they need to go to another website for coupons when they can get them from Facebook?

Groupon is now stuck. They can’t spend more money on adversiting because they need to show better balance sheets, yet on the other hand, if they stop advertising, then they will lose market share and they will be killed on the long run.

Is there a way out? Will Groupon survive? Unfortunately, I don’t think so, I think they should have accepted that $6 billion from Google a year or so ago. But then again, it seems that a lot of these new technology entrepreneurs have RIM’s stubbornness and weird mentality (that they will rule over the world).

I think the biggest sucker is the company who will buy Groupon right now, because in a year from now, Groupon will be another bebo, and whoever buys it will be another AOL, but hey, there are lots of suckers out there.

Groupon’s business model is a complete failure (they will never ever make money), and I feel pity for whichever company suckered into buying this piece of useless trash.