There has been a lot of speculation about the valuation of Groupon assuming an upcoming IPO. The numbers that have been circulating have ranged from 15 billion to 25 billion dollars. This is after Groupon turning down a rumored 6 billion dollar offer from Google late last year. Well I for one don’t get it.
What is Groupon anyway. It is in essence a digital coupon service. Groupon offers members large discounts for services and merchandise from merchants that are local to the service subscribers. The subscriber typically sees a 50% discount for some product or service. They pay Groupon for the “coupon” that gives them the service and Groupon splits the revenue with the business.
Reviews from businesses that have used the Groupon service are mixed with some businesses underestimating the number of coupons that would be redeemed and ending up losing money. In Groupon’s defense the merchants can limit the number of coupons redeemed. Other businesses state that they get people coming in that are new to the business but they see almost no return business. This is not surprising as the people that buy the Groupon coupons are frequently just looking for a really good deal and move from one deal to the next with no intention of finding a new merchant to frequent regularly.
The real problem that I have with Groupon is that there is no differentiator for their service. There are few if any barriers to entry and there seems to be a new Groupon clone emerging every couple of weeks. Just to name a few there are: LivingSocial, 1SaleADay, BuyWithMe, CrowdSavings, Weforia, Coupme, Groop Swoop, Groupalia, TownHog, TeamGrab, Agenzy, DailyQ, Tippr, Woot, Ideeli eWinWin and many more. Given the rapid duplication of the functionality of Groupon what is likely to happen? The answer is competition. The revenue split that is offered to the merchants will improve in favor of the merchant as one coupon service competes with the other. The size of the discount in the offer will likely diminish as merchants realize they don’t need to give 50% off to attract bargain hunters. The net result will likely end up being what we see in paper coupons today. The customers will get an offer of 5 to 10% off and the merchants will get 90% of the revenue that the coupon sites collect. These numbers are of course just best guesses and the actual percentages may vary but not by that much. In short the Groupon model will migrate to the paper based coupon model and the appeal for both merchants and consumers is likely to diminish.
If you assume this is the path that these sites will take the real question is why would Groupon be worth 15 to 25 billion? First mover in a market with few barriers to entry doesn’t buy you that much.
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