Literally Worth Billions

If you spend very much time online looking for great discounted deals, you have probably heard of a company called Groupon. While you may not know exactly what Groupon does or how it operates, two things are certain; it has raised a lot of seed capital and turned down a $6 billion dollar buy-out offer by Google. How can a company that most people are unfamiliar with and only two years old be worth 6 billion dollars? It’s simple, because financial experts and capital investors say so.

Very succinctly, Groupon is an online service that offers digital coupon discounts to its subscribers for services and products. Unlike traditional paper/digital coupons, Groupon’s coupons (called Groupons) are very limited in time and numbers of redeemers. Additionally, you must pre-pay in advance for a Groupon. So in essence, Groupon really doesn’t work like the regular store coupon in a number of ways.

Even with the controls on redemption numbers, Groupon has been very successful. As of March 2011, it was reported that Groupon had signed up around 80 million members to buy 33 million Groupons. While those numbers may seem large, it is only a small fraction of the 3.3 billion (with a “b”) traditional paper and digital coupons redeemed last year.

Since it’s inception two years ago, Groupon has saved its members over 2 billion dollars. By comparison traditional paper/media coupons saved consumers over 3.7 billion dollars in the US last year alone.

The Craze to Cash In

Groupon appears to have caught on with many people who want to try out a service or product at a discount rate and there are businesses willing to take the risk. Groupon is definitely not cheap. Not only does Groupon selectively choose their customers, the cost for redeeming a Groupon is 50% of face value of the deal. So if you are offering a beauty salon offering a facial for $70 at a high-end spa, expect to pay $35 for that redemption, leaving you only $35 gross profit. Groupon also writes the ad copy and controls all aspects of the Groupon very closely. Your “say so” in the advertising will be very limited.

From a consumer standpoint, that $70 may have stipulations that you purchase additional items or pay extra for fees and taxes. Furthermore, there is a short, limited time window to use the Groupon that you have already paid for.

Groupon’s redemption rates are 80 to 90% instead of a normal 1% redemption rate for traditional coupons. Restaurants, spas and others who use Groupon risk the problem of “consumer floods.” Groupon can quickly bring in a large number of customers looking to redeem Groupons all at one time.  This can inundate a small company or service. In some instances customers find out they could have purchased the item or service cheaper than the coupon. A recent Groupon for an FTD voucher was $5 to $10 more than what other visitors paid at the FTD site.

Does it Really Work?

As with any service or product, there is an established monetary compensation (price) and a return on your expenditure (value). From the consumer standpoint, Groupons can be a great way to try out a new service or product at a reduced cost. From Groupon’s standpoint, they elevate a company’s brand image and bring in customers who are interested in a specific product or service. Even so, Groupon’s business model tends to get fuzzy when it comes to building repeat business.

The comments from companies using Groupon range from euphoric to something less than disaster. Jessie Burke, the owner of Posies Cafe in Portland, Oregon, who in September 2010 shared on her company blog that working with Groupon “has been the single worst decision I have ever made as a business owner.”

Even though Groupon is a great marketing tool to get “wallets and purses through the door,” it is still going to be the outstanding service that wins the consumer’s heart for repeat business. In most instances, customers will “cherry pick” these deals for a one-time experience and never return. In essence, Groupon is part of a bigger overall marketing strategy and not a one-shot, silver bullet solution to building business in a day. If your marketing budgets are limited, you need to think hard about the risks and rewards of your expenditures.

Anything You Can Do I Can Do Better…

Groupon has not only caught the attention of businesses and consumers, other competitors are on the horizon. LivingSocial based out of Washington, DC is projected to overtake Groupon’s lead position in the industry by January 2012 according to some estimates. LivingSocial is a much smaller company than Groupon, but even so they are a viable competitor and are a thorn in Groupon’s side. Launched in 2009, LivingSocial has financial backing from some heavy hitters too, including Amazon who has provided $175 million dollars to the start up.

For this moment in history, Groupon is a very successful company in the eyes of its beholders and devoted customers. As the service matures and the business model develops, expect to see changes in its policies and pricing strategies. Also, it would reason that they will develop means to facilitate repeat business. As of this writing, Groupon is looking to go public with the company which could raise a massive financial war chest. As with all businesses, time will tell the tale.

To make matters more interesting in June of 2011 Groupon filed papers for an IPO, just two weeks after the public offering of LinkedIn. According to Groupon’s own estimates, they expect to raise $750 million in capital. Time will tell, but for the moment the $6 billion buy offer that was rejected sets the stage for a very interesting public offering and very high expectations for Groupon’s continued success.