Groupon Pours More Gas on the Fire

Group buying just got hotter. The whole segment went on everyone’s radar when Groupon announced in December that it had raised $30 million on top of a previous $36 million. That round reportedly valued the company at $250 million and helped spawn copycats galore (though Groupon is not the first group buying site by any means).

Last night TechCrunch reported that the site had raised a “huge” new round with a valuation of $1.2 billion. That will further ratchet up the frenzy that already exists around couponing/group buying.

Although these companies are positioned as something new, in the wake of the rise of the social Internet, (Groupon uses the term “social commerce”) it’s the old reverse auction (prevalent in the late 90s) with local couponing at the core (hence the name). And it’s fundamentally about online driving offline, though there’s an e-commerce component.

There are now literally dozens and dozens of companies in the US and Europe doing something very similar. This segment is hotter than a lobster in a dutch oven, you might say. Groupon is trying to get to scale faster than others and build its brand.

Previously aggregator Yipit, which positions itself as the “Kayak of group buying,” pointed out that there were more than 40 of these sites in the US as of a couple of months ago. It’s only going to get bigger as traditional publishers and others try and get into the game and these sites push their deals out through established channels.

Groupon right now is doing something of an “arbitrage” play: acquiring consumers through online display advertising and then selling them to local businesses for considerably more. I wrote a recent post, “The Dark Side of Grouponing,” based on an interview with a restaurant owner who said that the system “worked” but that there were lots of hidden issues and pitfalls.

That post received considerable discussion with one marketer pointing me to advertiser satisfaction stats on the Groupon site to refute the thrust of my post:

In response to the general trend but trying to provide more tools and/or flexibility to advertisers and publishers are Analog Analytics, which offers couponing/deal tools to traditional publishers, and Closely, which offers an array of promotional/CRM tools to SMBs and publishers.

I also had a very interesting conversation with David Ambrose, the co-founder of NY-based Scoop Street, not long ago. Among other things he and I discussed how these sites were competing with all the other channels and media trying to get SMB/local business attention and mindshare and how the model might influence the “culture” of local advertising.

There’s no question that Groupon and its kin “work” and are well-liked by consumers. Here are the questions that surround these sites in my mind:

• Is there staying power in the market?
• Will SMBs “burn out” on these sites, especially as they compete with one another to offer more aggressive consumer deals and bombard SMBs with calls? (This is where brand comes in.)
• Will their value proposition (pay only for real customers, get money up front) have a broader impact on what SMBs expect from “advertising” and are willing to pay for?
• How will grouponing and the business model question immediately above affect traditional publishers/media channels (even search and other online channels)?

Three years ago at SMX Local-Mobile I ran a panel called “The Ultimate Local Ad Model” which asked the question: will the local market migrate to lead-gen and other CPA models from PPC and CPM? The panelists argued “no” and that multiple models would co-exist. I agree with the latter statement but there’s something significant going on here that is roughly comparable, in a way, to the whole phenomenon of “geo-social gaming” and how it may be changing the culture of the local-mobile segment.

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