Apr 5 2010

group think


A few people have been asking about my thoughts on GroupOn.  This post presents some general observations on their business model and the impact on local promotion marketing.  Soon, I’ll take a look at how we view and apply this learning in our business model at Closely.

As a consumer, and as an entrepreneur, I love GroupOn.  They have build real velocity into a large market need and space, executing exceptionally well on a quality business model.   I also am impressed how they have backed their brand strategy with real attention to customer service.  For those not familiar with GroupOn, explore here.

perfect timing

In 2008, consumers began a mega-shift to conservative behavior with their discretionary income.  GroupOn’s proposition hit at the right time, aiming straight into the heart in this shift – offering urban consumers a new way to treat themselves again.  Creating a model of daily deep discount savings to interesting local restaurants, salons and activities, they struck a chord. Delighted by the great new bargain venue, consumers connected themselves together into a large and powerful consumer social list.

GroupOn connects this consumer desire together with lead-starved local businesses who are anxious to pump up their volumes, but cringe at the risks inherent in traditional media spending.  Their business-side innovation comes in the form of a compelling performance-based model, where a business pays out of the proceeds of customer purchases.

social light

Industry analysts point to GroupOn as a next gen social media company.  To me, GroupOn feels more like a contemporary version of a traditional media model.  Let me explain.  Social media is certainly the foundation upon which GroupOn engages their vibrant consumer base.  However, to the participating merchant this is a performance based media buy.  Advertisers buy a distribution slot to GroupOn’s list, which is opaquely retained by GroupOn.  The business gets leads and it’s up to the business to convert those leads into customers and onto their own social lists.  This is a classic third party lead generation proposition.

the group that became an audience

On a related theme, I also don’t consider GroupOn to be about group buying, at least not anymore.  At the outset consumers were socially engaged to share deals with friends in order to hit a purchase threshold before everyone got to share in the deep discount.  Those days are long gone, GroupOn now has a mass local audience in most major metros, removing all group volume “risk”.

There is no disputing the company’s ability to aggregate substantial purchase behavior against deep discounts to interesting places.  However, GroupOn’s scale now positions it as a predictable engine for large scale purchase of discounted products/services. It’s a powerful weapon to be used by a business perhaps once a year, maybe 2-3 times at most.

the new local tour bus?

I find it interesting that GroupOn describes itself as a City Guide of sorts – viewing its product to be the impetus for people to get out and explore more new places. The brand is aiming at a somewhat curatorial style of their featured discounts. At the recent Kelsey conference, GroupOn’s CEO innocently snubbed Valpak with a comment to the effect that those kind of deals wouldn’t fit their brand.

Some restaurant and salon operators have voiced concern that GroupOn is creating a troubling behavior pattern with consumers that works against their ability to convert the GroupOn lead into repeat customers. Will they drop in and never come back, as the move on to the next deal? Is the GroupOn consumer more into drive-by consumption than loyalty?  While it’s probably just too early to judge, one thing is certain. The growth in GroupOn’s consumer list, combined with the rapid proliferation of copycat companies will most certainly give the consumer the opportunity to collect a drawer full of deep discount offers.

In some ways, GroupOn feels like the next Yelp, but with a dramatically better business model. It must be pretty annoying to Yelp investors to see their 10X audience generate revenue that is probably no more than 20% of GroupOn’s.  It’s highly predictable that Yelp and MANY local media companies are looking jealously across the GroupOn bow, with an intent to flatter the company with their own form of replication.

too much of a good thing?

From one lens, GroupOn is arguably doing too well.

A brief browse through recent deals show a scale of buying that is a runaway success in lead generation. However, the success formula relies on a deep margin risk to the participating merchant. The merchant appears to be averaging a net of 25-30% of the retail price on the consumer products and services, in low operating margin businesses.

To make the deal math work, the business has three critical ways to make the offer participation a smart decision.

1. Ensure that the average bill paid extends beyond the coupon’s value,

2. Convert the new leads into repeat clientele, and

3. Handle a deluge of reservations without sacrificing cost and/or consumer experience.

GroupOn appears to do a good job in working with their customers to ensure they understand this formula. These parameters, however, do make it more appropriate for some segments than others.

As a personal observation, I’m seeing more deals aiming for lower price points ($10 for $25, versus $20 for $50) which I suspect is a technique to drive achievement of goal #1. Perhaps it also signals a growing frustration with the “tour bus effect” of the GroupOn clientele.

In my experience Issues # 2 and #3 represent the things that many small businesses are ill- equipped to manage. If businesses cannot handle the scaled volumes, or cannot make the math work, GroupOn’s model will be challenged to evolve, perhaps in ways that make them vulnerable, competitively.

is this the google moment for local direct marketing?

There is one other piece of the business case that GroupOn is quick to point out to the merchant.  The size of GroupOn’s email list is now sufficient to deliver business visibility that is comparable to the scale of major placement in a leading local newspaper or zine.  This “budget savings” argument may well carry the worst news for incumbent media players.

If GroupOn (and their clones) continue to perform, the impetus to spend marketing dollars on newspaper, coupon services, and local magazine display could be stunted.

Traditional local retail and direct marketing spending feels like it is on the cusp of being challenged, hard, by a performance-based lead gen model. Sound familiar?

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