Groupon - Is it Really All Just in The Voice?
Interesting article in today's NY Times about Groupon:
Funny or Die: Groupon’s Fate Hinges on Words
This excerpt captures the major theme:
The big Internet companies owe their dominance to something singular that shut out potential competitors. Google had secret algorithms that gave superior search results. Facebook provided a way to broadcast regular updates to friends and acquaintances that grew ever more compelling as more people signed up, which naturally caused more people to sign up. Twitter introduced a new tool to let people promote themselves.
Groupon has nothing so special. It offers discounts on products and services, something that Internet start-up companies have tried to develop as a business model many times before, with minimal success. Groupon’s breakthrough sprang not just from the deals but from an ingredient that was both unlikely and ephemeral: words.
Words are not much valued on the Internet, perhaps because it features so many of them. Newspapers and magazines might have gained vast new audiences online but still can’t recoup the costs from their Web operations of producing the material.
Groupon borrowed some tools and terms from journalism, softened the traditional heavy hand of advertising, added some banter and attitude and married the result to a discounted deal. It has managed, at least for the moment, to make words pay.
So $1B in revenue and $50 Billion in valuation apparently all comes down to some good copy writers. That would indeed be the ultimate feel good story for all those media companies out there!
Alas, I think it's a bit more complicated than that. I've been telling everyone for the last few months that if they can get in on Groupon in the private market - pre-IPO - it's a big score. But they need to get OUT within 2 weeks after it goes IPO.
It's not that I think Groupon is a bad company or their business model horribly flawed. It's just that its not defendable. I think they'll survive long term, absolutely. But whatever insanely inflated valuation they get at and after IPO will come crashing down to earth in the face of the withering onslaught of competition from every sector. This is not 1,000 stings -more like 100,000 - and some of the companies stinging - e.g. Facebook which launched its own deals offering recently - have mighty big stingers.
The article actually misses the most important part of Groupon's success story from my POV. What they are really riding now is not funny copy, but rather social vortex effect and scale.
Consumers are smart. The coupon craze is a great deal for consumers - who doesn't want great stuff at half off or more?? And right now Groupon by far has the most good stuff that is dirt cheap. I recently used a coupon to send my mother flowers from FTD for Mother's Day for $15. Great deal! The problem is that I have paid FTD approximately $75 every year for the last 10 years to send her the same flowers.
So what did FTP get here? A new customer? Nope. A more loyal customer. Heck no. If the offer had been from some other company, that's who I would have used. What they got was snookered. They just paid out $60 - $30 to Groupon and $30 to me to get nothing of any business value.
So, Groupon is riding scale - more manpower, more marketing muscle and the mother of all e-mail lists - to have more and better deals than anyone else. And consumer vortex affects are driving absolutely crazy, out of this world exponential growth.
But at some point this party is going to end. Not only will the vast array of competition start to bite, but more importantly retailers will wake up the the flaws of the model itself. And when it does, Groupon is going to be sitting there with massive staffing and overhead. Again, they can certainly downsize, regroup and remain the dominant player at that point. But meteoric growth will be replaced with something that Wall Street doesn't like quite so much.
It will be interesting to see a year or two from now how this prediction plays out. But that's my call and I am sticking with it!