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