Why Groupon is Worth $25 Billion Dollars

Posted on: June 5, 2011
Posted in Mobile


Admittedly, Groupon is a work in progress. They continue to spend insane amounts of money to acquire customers and merchants to try to extend their dual-sided network effect with consumers and merchants. Many people see this as unsustainable, some adamant it’s all just a Ponzi scheme.
But these naysayers who are fixated on the current “daily deal” economics as long-term unsustainable are completely missing the point. The real innovation Groupon brought to the table wasn’t in advertising deals per se, it was their ability to profit off of closing the attribution loop in online-to-offline commerce. And this is a huge land grab that others had completely missed.

Google never had success (monetarily) with online to offline search, because you can’t go to a search box and carry that discovery process to your offline environment. Yes, you can absolutely use a search query to find a place to go, but when you get there no one knows that you found it on Google…

The same can be said for services like Yelp. Yelp might drive people to restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new customer to Yelp. And how would they know? It’s not like you walk in the door and tell the restaurant owner you just located them on your iPhone via Yelp’s app. Foursquare hasn’t solved this either, despite having 250K merchants signed up and literally inventing the act of announcing your presence to the world. Both are great companies solving problems, but only Groupon has closed this attribution loop.

Groupon essentially short-circuited what others haven’t been able to do by inserting itself between the customer and the transaction. They gave merchants an advertising channel (yes Groupon is just an ad unit), and in return they immediately take a cut, regardless of when the voucher is redeemed. Groupon not only closes the redemption loop, but also banks the cash way ahead of redemption. Pretty sweet deal.

And Google understood how valuable this was a long time ago. It’s well documented that AdWords’ genius is its ability to harvest intent that was generated elsewhere. About 10 years ago, search became the last place where consumers interacted during many online transactions, and has since trumped all forms of intent generation via display advertising, review sites, and other forms of marketing. Those mediums generate your intent to buy that camera, but Google profits off of it.

This is precisely why Google wanted Groupon – they were able to solve a REALLY difficult problem in a simple way, creating an offline link between customer and merchant and profiting off of it. Hopefully for them a link that is valuable over the long term…

And that’s the exact issue in question that people are puking over. Those reading the S1 believe this merchant to customer link is very weak, because Groupon left out key metrics for effective customer acquisition cost and merchant churn.

That would be a sensible conclusion IF today’s email-based daily deal world were to remain static… if that were the case all this would be extremely worrisome. But things are changing. We’re entering the next phase for daily deals, something Groupon has been public about: real time bidding on remnant inventory at places around you.

In order for real time to work you need inventory. Lots of it. That’s why this is an onboarding and growth exercise to get people on the platform. It truly is a land grab. That’s Groupon’s bet and it’s why every major player is copying Groupon.

Fact is that right now a mobile commerce layer and a social / communication layer are being built out on mobile that will have unprecedented impacts on how we interact and consume things in our physical environment.

Trust me – getting email deals to your inbox will appear old and tired within several years. But that’s all local merchants can do today. They can’t bid for individual customers against “searches” because you don’t have an environment with enough context or sophistication on the merchant side to support an Adwords-like product for local commerce and there is no publishing platform to push this to consumers.

All this is changing. FAST.

First with massive creation of context: location/proximity, stored preferences, conversational sentiment, social indicators such as groups, and a bunch of stuff that’s temporally and geographically relevant to you and your group in the real world. I’m talking massive amounts of data.

And second with sophistication on the merchant side. Tablets are being put In place at the point of sale at an increasing rate, and a healthy percentage of merchants have now created accounts on daily deal sites. Google Wallet is coming online and almost subsidizing merchants with new point of sale technology. Surely Facebook is thinking about doing something to link credits with their new deals, and has arguably done a better job at self-serve deals than Groupon Stores.

I remember having a conversation with Vin Vacanti at Yipit awhile back, and we both talked about a future time when a restaurant’s staff will say to you “let me consult the tablet” to make decisions in the restaurant. Metaphorically-speaking.

Kind of like how you consult your iPhone when you need to do something in your physical world. The employee “consults the tablet” and pushes a lever to bring in some customers – it’s a little slow in the restaurant for a Thursday night. Meanwhile you are “searching” for somewhere to go to dinner that night with 4 of your friends. This is the future of self-serve at the merchant level.

An hour later your group shows up, dines, and receives the check. They bring the bill to your table in one of those standard-looking black folios—except it has an embedded NFC tag. You pay through a credit card linked to your mobile phone. Unbeknownst to the waiter, you purchased that deal in real time 1 hour before you went to dinner and get 20% off, right after assembling your group, planning, deciding, and purchasing on the go.

So the real end-goal for daily deal sites is in assembling a marketplace and exchange that has enough inventory and users to support these types of new online to offline behaviors at massive scale. And if Groupon doesn’t figure it out, someone else will. There is way more money to be made in offline commerce than there is in online commerce. Everyone knows that by now.

The reality is we’re in inning 2 or 3 of deals and local commerce. We’re moving away from these static one-time deals toward a marketplace for your attention in the physical world. And someone is going to make a lot of money off of it.

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