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Groupon – I Just Don’t Get It

by Van Baker  |  March 24, 2011  |  3 Comments

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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Tags: coupons  groupon  retail  social  

Van L. Baker
Research VP
20 years at Gartner
29 years IT industry

Van Baker is a vice president and research director for Gartner's Retail and Manufacturing Industry Advisory Services. He covers consumer behavior as it relates to electronic commerce and emerging Web 2.0 technologies in the retail industry. Read Full Bio

Thoughts on Groupon – I Just Don’t Get It

  1. Per Olsson says:

    Isn’t this the problem with coupons that it doesn’t work with what many merchants work with, keeping their current customers satisfied and happy so they come back for more business instead of getting one time customers that are quite expensive to work with.
    I believe that these coupons dig their own grave (of course a quite rough statement) since it is cheaper to keep a customer coming back than getting new customers in the store.

  2. Danny Buelna says:

    The reason for the value (6B to 25B) is that investors like many business owners are not that smart. They will follow anything shiny and new.

    Regarding your prediction of the move to a traditional print/web hybrid is correct. Although this model is much more difficult to achieve. Any monkey in a suit can create a website or blog. Just try to print, distribute and generate enough revenue to cover your costs and see what happens. These reality’s will eliminate 99% or more of the competition. It’s a tough world.

    The appeal of coupons will remain high with consumers as well as business owners. They are an easy way to track your customers and publishers. The cost of the discount and commission or fee can be added into the product price. As long as both discount and commission are low.

  3. J W says:

    I am a person thinking about to start groupon business and need some guidance.

    In below scenario will it work: a win-win situation?

    Within one month:

    Number of product. Whole sale price Retail price

    50 10. 20
    5000. 5

    Groupon price: 10 for 5000 person group buy. For each item business earn 2.5 and groupon earn 2.5

    Earning retail : 50*10= 500
    Earning groupon : 3000 * 2.5= 750

    Results : cause competition between business owners.

    Suppose retailers only buy 50 products each time.

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