Google’s recent reported $6 billion bid for Groupon — rebuffed, for now — took observers by surprise and worried the company’s investors. James Surowiecki analyzes the deal and Groupon’s business model. “Groupon, by contrast, is a much more old-school business. It doesn’t have any obvious technological advantage. Its users don’t really do anything other than hit the ‘buy’ button,” writes Surowiecki. “And its business requires lots of hands-on attention: thousands of salespeople to sell to and service local businesses, copywriters to come up with the right pitches for customers (Groupon’s clever ad copy is one of its selling points).” Despite these caveats, Surowiecki points out that “[t]hese days, the Web is full of good, solid businesses that may not be remaking the world but that are helping give people what they want. If that’s what Groupon ends up being, well, there are worse fates.” [%comments]
Why Groupon Works
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Groupon’s profits will be competed away. There is absolutely nothing about it that cannot be easily duplicated- and for way less than 6 billion. Groupon’s CEO may go down as making one of the most bone headed decisions in the history of business to turn down Google’s big bucks.
My assumption is that somewhat over 50% of Groupons purchased never get used… which cuts down that loss really quick.
I don’t think Anyone believes they are going to save $18,000 when they buy an Entertainment Book. (I buy one even though I probably use less than 1% of coupons)
I agree with Tom Kelly here – good for Google bad for Groupon investors. Many supply-side providers will not return because the campaign either cost too much or it met their goals for promotion (note Ezzie, kind of). Groupon’s gimmick won’t work when the suppliers peter out. On the buy side, the novelty wears off and Groupon purchasing certainly looks less attractive when all that’s left is discounts on tax preparation. Some markets like NYC may be large enough to keep supply side interesting, but in 2nd tier markets like Minneapolis, Groupon is a flash in the pan – a dazzling one – but still short lived.
If Groupon’s cut is 50%, and most sale items/services are discounted by 50%, then in order to break even marginal cost needs to be <25%. Seems a rather expensive promotion otherwise. Of course, it would be handy if you need to dump inventory.
In this economy, lots of small businesses are just another month away from bankruptcy. The house is leveraged, the credit cards are at their limit. Can’t Groupon become the ultimate hail mary pass? ” I need cash NOW; paying 75% profit (50%-off coupon; 50% “fee” to Groupon) to someone else in exchange for a cash infusion NOW is worth it. If that high risk play gets me through to the other side; great. If not, I’ll know I tried everything.”
The gap between hail mary pass and fraud is just a matter of intention.
Even if Groupon can argue in court they can’t be responsible for knowing that their biz partners were highly unlikely to survive to redeem the coupons, I’m not sure they could survive the PR disaster.
Look guys they are kicking butts all major markets. Go after them or stop complaining. One more market traditional media let slip away! A number of my clients are using competitors to gain back market share! What are you doing?!