Groupon, Sure. But Is It Sustainable?

The rapid rise of the “social commerce,” “group buying” or “social couponing” (whatever you want to call it) is sort of amazing to me. One interesting question that comes up in my mind is: Will the model that these sites offer start to “bleed” into other areas of local? Perhaps a better way to frame it is the following: will these types of sites put pressure on more traditional ad models being sold and promoted by other local sales channels, including TV, radio, print — even other online?

They’re not selling leads or clicks or even calls; they’re selling customers (albeit at a massive discount so margins disappear for the SMB in some cases). There are also others in the market like RedBeacon and HelpHive, among a few others, that are taking a commission on work actually performed. These sorts of models make “advertiser” acquisition much easier: “customers not clicks.” How widespread might this become? That’s a question I’m mulling over.

Lost Remote recently  highlighted an interview with Groupon CEO Andrew Mason in which he discussed how successful a Groupon promotion was for one particular business:

“[W]e recently featured helicopter lessons in Boston and sold 2,600 in four hours. To put that in perspective, this fellow has been in business since 1985 and in the quarter century leading up to his Groupon he had acquired a total of 5,000 customers.”

On the other hand here’s a recent article from the SF Chronicle about how one local business was overwhelmed by the demand Groupon delivered:

When Philz Coffee Inc. offered half-price $20 gift cards to users of the Groupon.com coupon site, the San Francisco chain of coffee shops figured it would get a few hundred takers. It got more than 2,000.

“I nowhere near projected the amount of people that showed up,” said Philz President Jacob Jaber, who doesn’t expect to offer that kind of deal again. “We ran out of gift cards, and we just weren’t prepared for it.”

Philz Coffee’s Jaber decided his company is established enough to rely on word-of-mouth marketing. Most of Groupon users that pounced on the gift-card offer were already Philz customers, so it didn’t provide too much benefit, he said . . .

Too much demand and many buyers were already customers . . .

There’s little SMB education or “best practices” right now on how/when to use these sites and how to “acquire” new customers who take advantage of these offers. Over time I would also imagine there will also be mechanisms for managing offers to existing customers or weeding them out entirely.

I’m also starting to see Groupon ads on marquee sites, such as this ad appearing on NYTimes.com:

Yesterday I asked LivingSocial CEO and Co-founder Tim O’Shaughnessy to pick some winners in the segment (beyond LivingSocial). He said that Groupon would clearly be one because of its scale and momentum. Then he saw Gilt Groupe as another very interesting player. He also said he thought one of the larger European companies would move into the US and become successful.

I’ve had the debate recently with several people about whether the group buying model is sustainable. Right now these sites offer new business but I’m sure they’ll expand into CRM or loyalty programs over time as well. I suspect the model is sustainable although it will need to evolve somewhat over time — and some of the flaws identified above will need to be addressed.

I would also assume that Groupon is on a course to go public. But there are plenty of smaller companies that cannot and so there will be consolidation and/or M&A opportunities for traditional publishers (YP, newspapers) and others (e.g., IAC) that want to get into the game.

Facebook is also lurking here as a potentially major player. Right now Facebook really doesn’t have a product to sell to SMBs (notwithstanding Facebook Ads). This would be one that would also be extremely appealing to consumers; it’s a natural in a way.

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15 Responses to “Groupon, Sure. But Is It Sustainable?”

  1. Harold Says:

    Interesting post Greg. In response to your mentioning the business margins, I actually came across a Harvard Business Blog discussing that Helicopter Groupon discount, and the effect it had on the business. Here is the link:

    http://blogs.law.harvard.edu/philg/2010/03/19/groupon-marketing-results/

  2. Greg Sterling Says:

    Interesting thanks . . .

  3. Malcolm Lewis Says:

    Seems most effective for building awareness for new businesses, or those that have heretofore done a bad job of promoting themselves (eg the helicopter biz). Sounds like Groupon’s customers should cap leads generated through a Groupon campaign (though I imagine Groupon will impose some minimums). Very interesting space. In hindsight, it’s amazing that it didn’t emerge sooner. Kudos to Groupon and others for leading the way.

  4. Greg Sterling Says:

    It did about 10 years or more ago with Mercata and other sites; however the model wasn’t quite right and the public wasn’t ready – nor were the local merchants. Timing is everything.

  5. Chad Burgess Says:

    It is interesting with all the 2nd tier sites cropping up. One I have used as a buyer is http://www.scoopst.com/ after I ran into the founders in NYC – really nice guys that were in my class at Georgetown, but never knew. My experience with them was great (again though as a user).

    As the space get’s more crowded the battle for SMBs that are actually willing to partake in such acquisition strategies will be fierce.

    What do you think of aggregators i.e. Yipit http://yipit.com/?

  6. Chad Burgess Says:

    Looks like Greg wrote about Yipit previously:

    http://gesterling.wordpress.com/2010/02/24/yipit-group-buying-and-smbs/

  7. Chad Burgess Says:

    Yes, I just checked out TheDealMap. I don’t like their (new?) site – too complex with that heat map.

  8. Pat Says:

    Not sustainable. Barriers to entry are too little, & now anyone (including nespapers) can participate. Long-term, SMBs will keep a greater share (Groupon & Living Social currently keep 38%).

    Existing publishers obviously have a leg up b/c they don’t have to spend $20-$25 to acquire each additional double-opt-in email.

  9. Greg Sterling Says:

    Pat:

    Yes everyone’s doing it. I agree: lots of noise in the segment and that margins will come down over time because of competition. Not so sure you can easily dismiss Groupon however.

    Site is well funded (and is/was profitable I believe). Also there’s an emerging consumer brand.

    Why didn’t newspapers win in local? They should have given their brands and content. But they failed to execute. Same could prove true here.

  10. Pat Lazure Says:

    It is fair to say that newspapers have had a difficult time executing, but with companies such as Analog Analytics (which we first learned about from your post: http://gesterling.wordpress.com/2010/03/09/analog-analytics-helps-publishers-challenge-groupon/ ), third-parties are taking the heavy lifting out of the equation.

    I do believe that Groupon will continue to be a major player, but IMHO I foresee massive fall-out amongst the second and third-tier sites.

  11. Greg Sterling Says:

    Hey Pat . . . I hope they’re helpful.

  12. Marcus Says:

    Interesting discussion. I recently ran into a local (Houston-based) Web site that offers similar services and seems pretty good. It runs on a very similar model to some of these larger scale sites, but offers some great deals on local restaurants, spas, etc.

    http://getgrouby.com/

  13. Top 10 Things a Successful Start Up Entrepreneur Must Focus On | Fresh Starters – A New Breed of Entrepreneurs Says:

    [...] make sure you have something that can not be easily copied. Groupon is a company having trouble withthis exact problem. Their business model is easily copied and they have a slew of new copycat competitors. 5. Find A [...]

  14. Sarah Says:

    Hey Chad,

    Another good deal aggregator out there is http://TheDealPages.com. They have all the deals from Groupon, LivingSocial and the other top group buying sites. They let users search deals based on category and location.

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