Who is Losing from Groupon’s IPO?

Groupon is clearly the poster boy of a new era of commerce and one of the fastest growing companies of all times. As rumors of their $30B IPO hype started spreading around the interwebs, I wanted to spend a couple of paragraphs on the losers.

Wait, are there losers here? Isn’t Groupon a win-win situation? A win for customers who pay 50% less, as well as a win for the local service providers who gain numerous new customers over night?

Groupon is expected to generate revenues of more than $2.5B in 2011, and assuming Groupon did not single-handedly expand the economy, these revenues represent a budget shift and had to come at the expense of someone.

So, who are the losers here?

The biggest loser is the media industry, and specifically, the printed media industry. Historically, local businesses used local print media to advertise their services: ads in a local newspapers and magazines, signage, handouts, direct mail and coupons. Local businesses have also been experimenting with online advertisements, especially within locale-focused websites such as Yelp and craigslist, a trend that will continue to grow. Groupon’s model, however, promises an exciting new model – an inflow of customers at a known variable cost (50% discount + Groupon’s fee), with no fixed costs and literally no risk.

No need anymore to delve into complex mathematics of conversion, especially since most of the advertising opportunities of local businesses are offline and do not allow for easy measurement of effectiveness and ROI. So, once Groupon allows local businesses to enjoy a stream of incoming new customers, they should focus their attention on retention and repeat customers vs. spending hard money on additional media exposure.

SMB-Ad-Spending.jpg

(Source: Yipit)

The second loser is small businesses. How can I claim that after the previous paragraph? Well, if you are the only player in the game, Groupon is great for you. But the problem with these deep discount deals is that your competitors use the same mechanism to attract your customers to their businesses. Let’s suppose you are a masseuse, and that a massage in your area costs $80 / hour. Once your service is up at Groupon, you will receive a bunch of new customers who paid $40 for a $80 service. It’s a great value indeed. Groupon will keep their share, and you end up receiving approx. $20 per massage. Not a lot of money, but you would think to yourself, ‘hey, I am getting paid AND I acquired a happy new customer’. The problem is that within some industries, customer loyalty is very price sensitive (Yipit estimates consumer retention at merely 19%). Once your customers see a 50% massage discount for another spa in town – they may feel that paying a full $80 for a massage is too pricey. This lowers the perceived value of your services, and will eventually lead to a price reduction across your industry. [Update 6/10/11: Techcrunch wrote an interesting article titled Groupon Was “The Single Worst Decision I made as a Business Owner”]

The third loser is us. The Groupon experience pushes us often to make purchase of unnecessary goods and services, using the same technique savvy sales people will apply on you at the store: you must buy now! It’s a one-time deal and 50 people already purchased it! Are you really going to miss up on that great opportunity?

Groupon-Buy-Now.jpg

So, we succumb to fake social pressure created by a smart user interface, spend money and collect coupons for services we may end up never using (Various sources cite average coupon redemption rate at ~75%; Quore has a good thread with redemption data points).

Coupon Collection.jpg

Finally, the local and global economies are taking a hit as well. The success of local businesses (including local print media) is key for a successful, balanced economy. When revenues shift from a large number of local businesses into a few mega-large market makers (Groupon, Google, etc.), economies lose their equilibrium. Perfect markets are great for economy text books but are horrible for local economies.

Do not get me wrong however: I am really excited (and jealous) of Groupon’s success. It’s exciting to see how companies emerge from an experimental idea to global market makers and shakers. If I only had the chance to invest in their first round of financing, I would have had someone else write this blog post on my behalf while I’m visiting the space station. In the meanwhile, I’ll have to wait for the right coupon. 50% off a $20 Million trip is quite a discount, isn’t it?

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