Despite articles to the contrary, many think that Groupon is valuable and still has big potential. I agree, but wonder if my reasons are different. I think that their deep discount model is unsustainable as Groupon’s longevity is reliant on repeat business. Much of what Groupon does is not new; deals, time-limits, coupons. What Groupon has done is more impressive than it may seem; Attribution. The biggest advance that Groupon has made is that it makes an online recommendation of an offline venue (a place). This again in itself is not new; tracking the success of that recommendation is.
Once Google worked out Adwords it exploded in value. Google get paid whether a sale is made or not as companies pay for clicks to their website. Facebook collected data on people, and allowed people to organise themselves into interest groups, to ‘like’ products, people and companies. Once Facebook perfected an ability to market to subsections of groups, (“Married Women, over 25 in Boston Who Like Britney Spears”) their value rocketed. A commerce website has to be incrementally improved to be a machine that can continually convert those visits from Google, Facebook (or anywhere else for that matter) into sales. Whole industries have grown up around the paid search platform. It’s still the same model though, companies paying for clicks not sales.
Affiliate networks have added tracking and attribution to this. An online recommendation can be tracked end-to-end to an online sale. Finance Directors prefer paying for actual sales rather than measuring the success rate of their site and paying for traffic; its complicated and not 100% reliable. A new wave of automated self-serve tools is hitting the web and online recommendation aligned to tracking sales is huge business.
Until now, all of this was fine and dandy for companies who wanted visits to their websites and who made sales online. But it didn’t do much for physical businesses. Whilst the move is to have online cover every aspect of your life, the internet can’t cut your hair.
Groupon has closed the loop between online and offline. They provide online recommendations for people who then go to physical, actual, offline businesses. Businesses are attracting new customers and paying Groupon for them on a success basis. Actual clicks to actual bricks.
The closed loop is as big as Adwords. Paying for a customer is a no-brainer. With one proviso; in order to make money, you must pay less for a new customer than you will make from them, even if they only come once. You need to structure the deal sensibly, and you need to measure its performance.
Coupon.com‘s recent $200m raise and announcements from Facebook, Google (and almost everyone else) that they will be joining the coupon club, shows that this industry is about to get really competitive. Like it did around Adwords, an ancillary industry will spring up around these coupons; businesses that grease the wheels or improve the performance of this new marketing channel. Any software or service that can improve margins for businesses, aid the merchants or the deal sites, will be snapped up in a phase of land-grabbing, improving chances of longevity in this soon to be highly competitive landscape.
The more insight a deal site can get into its merchants then the better it can help them. What’s the average basket size? When are you least busy? Is your business seasonal? How is your stock management? Knowing these things will be hugely valuable to merchants and deal-mongers alike. Software as a service businesses such as accounting services, stock systems and booking and voucher redemption platforms all represent sensible tie-ups in this field. Both sides will see advantages when they have better knowledge about the merchant’s business. Further to this, knowing which deal sites perform better with which business-types, and in what neighbourhoods, will help merchants target their campaigns and improve efficiency.
Horror stories in this sector are all too common and certainly repeated loudly. In order to succeed, deal sites will have to stop this happening. Merchants, often entrepreneurial small-business-types, are likely to be bullish about what volume of coupons they can do and so accept offers to sell thousands of coupons in a day. Groupon then duly focuses its powerful marketing lens on said merchant and as a result the business can be overrun. Dissatisfaction in this industry happens either when the merchant loses money or the customer is not able to redeem their coupon. Better insight, when it comes, will reduce this; a business will not be allowed to oversell and will be well informed of the money they will make on the deal.
Although this industry has been founded on huge discounts, sold daily, the closed loop is what underpins it. We can expect big changes from the status quo, the discounts to fall and people to successfully sell without time limits. Groupon’s IPO (should it happen) is likely to support the $25bn valuation (See Below). Expect all the major players to get involved, expect market leading small business tools to be compatible with the big deal site and expect them to have ‚Äòplatforms’ (think Facebook). Some strategic acquisitions in this vein would be well advised. New advances are coming in, tying online accounts and email addresses to offline transactions, Jack Dorsey’s Square (funded now by Visa) and Google’s new Wallet project will feature heavily and develop competitors of their own. Don’t presume Groupon will fail or that investors will lose their shirts. The loop is closed. Long live the loop.
THE ROAD TO TWENTY-FIVE BILLION DOLLARS
Groupon’s rumoured IPO is currently big news but they are proposing to only put 3% of the company public. This tiny percentage could be a sign that Groupon are planning profitability in the near future, but I think releasing a relatively small amount of stock to the market will keep demand high enough to ensure that astronomical valuation stays up there.
The Point was established in 2007 and raised $5m in VC in January 2008 as a community-focussed, “group action network”, before “pivoting” (sorry) to concentrate on their newer idea of daily deals and group buying. The Point became Groupon in November 2008 and caused a European start-up-clone goldrush in January 2009 when they announced a $30m cash injection at a $280m valuation from the very astute Accel Partners.
With their new valuation and trajectory they bought six-month-old MyCityDeal in May 2010 in a deal rumoured to have been worth a big number in cash for the Samwer Brothers as well as 10% of Groupon’s share capital for the Euro-clone-extraordinaires.
Groupon raised $950m in funding (admittedly immediately taking a large amount of this straight off the table) in January 2011 from Kleiner Perkins, the prolific investors who have chunks of Twitter, Flipboard, Lockerz and Zazzle and are, one assumes, not very easily parted from their money. “Sure thing” investors, Russian outfit Digital Sky joined the round. The valuation of the business for this round at $4.75bn probably explains the rejection of Google’s acquisition offer at $6bn barely 30 days before. They clearly felt they could go further.