Having heard of Google’s failed USD 6 billion bid for Groupon and its upcoming USD 750 million IPO that values it at an astonishing USD 25 billion, I thought I had better sign up to their Australian service and see what the hype was all about. More importantly, I wanted to see where the money was.
Does Groupon represent a revival of the late 1990s tech bubble, or it this a different sort of company that actually has a sustainable business model beyond the “price-per-clicks” metrics that were all the rage in those halcyon days? Just as a quick note: I will be looking at the US numbers and figures for Groupon, as they are much readily available and are likely to represent a more mature stage of the business than its Australian operations.
At its core, Groupon is a discount coupon service that utilises email and social networking to extend its reach. Companies sign up for Groupon and typically agree to give away 50% of the revenue generated from each coupon sale to Groupon.
Why would merchants do this? They are giving away a huge chunk of their revenue that, as is the case with many restaurateurs, they cannot afford to give away. Well, a coupon from Groupon only becomes activated once a minimum number of people sign up for it. This guarantees the merchant that their marketing efforts, essentially what a coupon is, will be noticed. Traditional, newspaper-based coupons never had this sort of guarantee, which makes Groupon more valuable for merchants than the old system.
Another benefit for merchants that Groupon offers is flexibility. Groupon tailors its service around specific sectors or business. Continuing on from my hospitality example before, the biggest benefit for restaurants is Groupon’s ability to target locals. Restaurants want to target locals, as they represent the best source of return business. As we all know, repeat customers are orders of magnitude cheaper to attract than new customers. So, Groupon offers a tantalising incentive for restaurants in this space.
So essentially Groupon is a marketing channel for local businesses. Even if you as a consumer do not take up their offer, you are still essentially seeing a local business being advertised at its core market from a respectable outlet. Additionally, Groupon also serves as a prod for consumers. For example, a new restaurant a few blocks down the road might have opened up and you have been meaning to try it out for a while. A Groupon for this restaurant comes along and voila! It nudges you from your neutral position (“I’ve been meaning to try this out”) to proactively go and seek out this restaurant (“I’m eating there tonight”). For consumers, a Groupon represents a commitment because of its short expiration date. You have to go now, otherwise the Groupon you just paid for will be wasted. Again, this nudges you from your default position of “I’ll do it later” to “I have to go now”.
Even better, and particularly for restaurants, Groupons also serve as a tool to get business, and hence cash flow, through the door during off-peak times. Even better, it is a tool for up selling. The restaurant might start off in a losing position with you paying $20 for $40 worth of food with your Groupon, but you add a bottle of wine, a few beers and maybe a dessert and all of a sudden the restaurant is profiting off you again.
With that said, I believe that Groupon will only work for certain types of businesses. Restaurants are a perfect example of this; retailers, where the goods are fungible or commoditised, not so much. This is because, unlike a restaurant, there is a very small loyalty component to your local retail outlet, particularly if you can get the same goods online for cheaper. All Groupon will do for this sort of businesses is bring in once-off customers who are unlikely to come back again. There are also all sorts of anecdotal horror stories out there indicating that Groupon is not for everyone – including restaurants.
As I have underscored, the strength of Groupon rests with its social networking capabilities to specifically target local neighbourhoods on behalf of business. Yet, there are other media outlets that do this better than Groupon, but their management has yet to catch onto this: metropolitan newspapers. Take a look at the Sydney Morning Herald and The Age. Both papers are major metropolitan newspapers. Both papers have significant, and well-received, food and lifestyle sections. More importantly, both papers would have the addresses, and linked email addresses, of hundreds of thousands of middle-to-upper class subscribers – the perfect target market for local restaurants. They should be monitoring their viewers reading habits and generating this data to extend a Groupon-esque service to their subscribers, thus enhancing the value of a subscription to the paper (and generating a new, high-growth revenue stream to boot). Even better, they already have the credit card details of subscribers, making for a seamless payment system for everyone.
I guess those expensive, easy-to-circumvent paywalls and iPad apps are generating much more revenue and growth than Groupon. Just ask Mr Murdoch.