In addition to social gaming, one of the fastest growing segments of the Internet is e-commerce.  After years of startup neglect or avoidance, a host of young companies are employing proven models and leveraging the social web to create $100MM+ businesses.   In a matter of only 18-24 months. The main reason for the rapid success is the wonderful combination of product/service scarcity with screaming deals.  These startups are delivering real value to consumers and building scalable revenues early in the life cycle.

Along with private luxury goods shopping site, Gilt Groupe, which was founded by two classmates of mine from HBS, there is no hotter e-commerce company right now than Chicago-based company, Groupon.  With Groupon just having raised $30MM Series B from Accel Partners, you will no doubt be seeing a slew of startups trying to emmulate their success by either extending the model to other categories or to other customer segments.  These companies are called “Fast Followers.”

Groupon takes the old Entertainment Coupon Books that your mom used to buy and brings it to the modern web.  Each day there is a “Deal of the Day” in a local city (massages, tickets to the opera, dining) for a screaming deal.  The trick is that the deal is “triggered” only once enough people buy in.  The notion is that this is supposed to create the incentive for you to want to share the deal with your friends and family, so everyone gets the deal.  It’s great for service providers because they can set the parameters for the offer and know how many they have sold in advance.  By combining the social web, virality, with hard-to-replicate deals, Groupon has created a compelling business model.

I decided to take a closer look at Groupon’s business.  While extremely impressed with what they have done in a short amount of time, I think there are a few things they, or a Fast Follower, could improve upon.

First off, what are people buying?  Based on the number of consumers, 7 of the top 10 sales across 5 cities were medium-end dining deals.  It is interesting to note that this was consistent across all of the cities- no one location dominates the list.

But, “cheap eats” and less popular restaurants might have a harder time driving sales.  That, and more niche businesses (such as singing telegrams, piano fixers, dinner theater) do not seem to be generating interest.  Given limited company resources, these are not providers and offers I would spend much time on.  They may even have the potential of “cheapening” the brand.

Looking at gross revenue, you can see some interesting patterns and potentially where the large opportunities might be.  Groupon sold $250K worth of “Napa Valley Wine Train” tickets, which is amazing.  That, coupled with the #2 highest grossing offer, a hotel, suggest that high-end experiences and local “staycation” hotel deals could be a huge business driver.  It was interesting to find that while the top 10 sales by people were distributed fairly evenly across the cities, Boston drove 8 out of the top 10 highest sales by revenue.  There is something about Boston and the demographics that makes the Groupon model so attractive.  Hmmmmm….

Contrary to my going in assumption, the actual discount matters less than the perceived value of the deal.  This suggests that Groupon might want to think less about pushing the % off and focus more on scarcity and the uniqueness of the deal.

I did a quick scatterplot of all the deals and the three outliers were Bartending school, the Napa Valley Wine Train, and the hotel deal.  Something about those deals in terms of price point, scarcity, value were the best from a business perspective.

Two final points.  One, I think the social component inherent in the product could be much stronger.  I’ll leave it at that.  Second, and most important (I am burying the lead on purpose because no one will read this far), the company needs to find a simple technology solution to allow service providers to self-list.  There is too much friction in getting listings.

Groupon is a terrific company that discovered a potentially valuable and scalable business model.  And they have executed incredibly well.  Here are the things they are someone else could do to make the company even better:

1) Provide a self-serve technology platform for business to be part of the service; everything is done currently by brute force, resulting in limited inventory.  Yelp and Google provide two models where local vendors have participated.
2) Leverage the social experience.  Despite the name, social is not a core part of the product experience
3) 2-3 biggest drivers of revenue, profitability, and scarcity: hotels, high-end dining, special events.
4) Target right offers to the most opportune audience
5) Personalization; one-size fits all now for all their offers


5 thoughts on “You Make Me Want To Group(on)

  1. Hi Steven-

    Fantastic post here on Groupon’s model; I’ve been doing a lot of thinking on this space as well but you took a far deeper dive into the data than I had – thanks so much!

    Re: self-service it’s fascinating to read that the highest discounted deals were *negatively* correlated with total sales. I had assumed if you did a self-service option you’d need to focus on really deep deals for success, but if it turns out that is not the case then perhaps that’s less of a concern.

    Do you think that Groupon and it’s ilk are too entrenched with their sales force to pivot to self service?

  2. Hi Simon-

    Thanks for reading and for the thoughtful comment.

    I think you are talking about the 2 critical aspects of building these businesses: 1) which kinds of offers will have the broadest appeal and highest margins and 2) how can the platform be designed most effectively to get in as many of those offers, in as scalable way, as possible.

    With regard to #1, these sites have to offer a base-level of “deals”- true consumer value. But “value” does not mean the rock-bottom lowest prices and will likely mean “affordable experiences” that are difficult to replicate. Because Groupon has a critical mass of followers, they should be able to convince retailers and service providers to create “exclusive” offers not found anywhere else. Once that happens, they will be difficult to dislodge from a leadership position. That is the beauty of network effects- more customers, more and better offers, more value for all parties.

    With regard to #2, sales forces are expensive to build and maintain. Because this caters to SMB’s (small, medium-sized businesses), they are notoriously difficult and expensive to acquire and to serve. And they are difficult to serve with technology. Think about your local grocery, spa, gas station, etc- technology is not their core marketing expertise. Hence, online companies that serve them like Google, Yelp, Citysearch, Yahoo, need to invest in people. But to create a scalable model, ultimately these companies need to create tools and services so providers can hear about Groupon, set up a campaign/offer, launch it and manage it without ever talking to someone at Groupon. Rinse and repeat.

    The value is that Groupon is a platform for exclusive offers. And it needs to provide the tools for easy access to that platform. Once this happens, watch out.

    • Hi Steven,

      Thank you for the timely and well thought out response.

      I definitely understand the expensive cost structure of the direct sales force, and had hence thought a bit about how to build a self-service platform for these type of local deals. A couple of issues I have been thinking through:

      1. I had been thinking that Groupon could be vulnerable to a self-service competitor the way that Yahoo! was to Overture and Google in the search wars – Yahoo! found themselves in a situation where their sales force was incredibly expensive and political reasons may have caused them to hold back on self-service (I’ve seen this happen at one of my former employers). This analogy may be imperfect, however, as Yahoo! may just not have thought of self-service and just completely underestimate the size of Search Advertising (and search in general, of course)

      2. I’m no expert on SMB’s, but it seems to me inefficient for each individual business (Gas station, restaurant, dry cleaner) to have to try to run advertising campaigns across both offline and online channels by themselves. Perhaps a new cottage industry will spring up to help these SMBs setup SEM/yelp campaigns/daily deals/etc?

      3. I definitely think the future is a combination between self-service tools and better targeting. There is no reason for me to receive groupons for pole dancing, so it seems to me if businesses can target the audiences interested in them it’s a win-win for everybody. I wonder what the mechanics of this would be – an auction system determining the different deals across a set of categories? editorial selection?


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