18 months ago, Groupon didn?t exist. Today, it has over 70 million users in 500-odd different markets, is making more than a billion dollars a year, has dozens if not hundreds of copycat rivals, and is said to be worth as much as $25 billion. What?s going on here?
There?s obviously something clever and innovative behind Groupon ? but what is it? Given that customers with Groupons are saving lots of money on goods and services, how can this possibly be good for merchants? Is there a catch somewhere? Is TPG?s David Bonderman right when he says that ?Groupon doesn?t do anything that four of us with a phone couldn?t do?? Or is there actually something very special about the company?
Bonderman?s thesis is basically that the value of Groupon lies in the company?s business model, and that since barriers to entry are basically zero, there?s therefore no value there. But I don?t buy that. There are significant network effects at play here: the more people Groupon signs up, the more targeted its deals can be. And there?s another social aspect to Groupon?s success I?ll come to in a minute.
But first it?s worth looking at the innovation in the name of the company: the idea that coupons only become activated once a certain minimum number of people have signed up for them. This is essentially a guarantee for the merchant that the needle will be moved, that their effort won?t be wasted. With traditional advertising or even with old-fashioned coupons, a merchant never has any guarantee that they will be noticed or make any difference. But with a Groupon, you know that hundreds of people will be so enticed by your offer that they?re willing to pay real money to access it. That kind of guaranteed engagement is hugely valuable, and more or less unprecedented in the world of marketing and advertising.
Then there?s the twist in the ?coupon? part of the name. No longer do merchants pay money for the privilege of giving coupons away for free in local newspapers. Instead, they receive money ? half of the total paid up front. There?s something extremely gratifying about being paid to offer discounts to new customers.
But there?s a lot more to Groupon than just groups and coupons. Groupons behave differently for different types of merchants, so let?s just look at one sector, which I think is Groupon?s biggest: restaurants. (One of the reasons that OpenTable?s share price is so high is that there?s a lot of hope it?s going to make serious inroads into this space, where it has certain advantages over Groupon, like being able to target people according to where they?ve eaten in the past.)
The most important aspect of a restaurant Groupon is probably that it?s local. Before Groupon came along, there was no effective way for merchants to reach consumers in their area, while excluding everybody else. If you?re a neighborhood restaurant, you don?t want to entice people who live miles away: you want to reach locals. And while Groupon isn?t quite there yet ? especially in New York, where a restaurant more than a few blocks away can feel like a schlep ? it?s orders of magnitude better at targeting than anything which came before it. And it?s improving every day.
Source: http://feeds.wired.com/~r/wired/index/~3/I9gjaIkFbQA/
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