Commentary

Groupon Is Hitting the Wall: Does It Have A Future Beyond Daily Deals?

It may be premature to talk about the “second act” of a company that just went public a few weeks ago and is the “fastest growing company in history.” But the data supports the theory that Groupon’s core local daily deal business here in the U.S. is hitting the wall.

To meet Wall Street's expectation that is priced into its valuation, Groupon needs to act quickly and decisively. What Groupon has going is that it has built the first new and growing nationwide local sales platform in the last 15 years. With the platform, Groupon has the opportunity to revolutionize adjacent local businesses and continue to expand at unearthly rates by selling additional products or services to SMBs.

The following are some of the major opportunities beyond daily deals that Groupon must consider.

Local search (online + offline) is worth $10B a year in the U.S.  Money is bleeding out of the print Yellow Pages industry and virtually disappearing into thin air -- at the rate of $1B a year.  The Internet players in local search -- Yelp, YP (AT&T Interactive), Google, Bing and Foursquare -- are not close to growing collectively anywhere near $1B a year.  As a result, there is a sizable opportunity left as SMBs continue to look for new customer acquisition channels to replace old ones.  

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Because Groupon has very little idea what a consumer might want, it must offer generic deals at a huge discount to get buyers over the hump for purchasing.  Search is the opposite.  The intent is clear -- as a result, discounts can be significantly lower than 50% off to generate a conversion.  

In turn, the lower discount enables higher ROI for the advertisers and a more sustainable business model for Groupon.  The fastest way for Groupon to enter this space is to acquire Yelp, which has the consumer usage but little capability or understanding of how to sell to SMBs.  It is almost a strategic no-brainer – but can the two companies learn to get their egos out of the way and merge their cultures to make it happen?
 

Expand Product Portolio Into Rentention, Viral Marketing

Word-of-mouth remains the cheapest and most effective marketing channel for SMBs.  The key to generating word of mouth is to focus on the satisfaction and retention of existing customers. Only 10 percent of SMBs should really be doing a daily deal promotion (part of the current problem with the daily deals business) and only another 20 percent should consider a search marketing campaign -- but 100 percent of all SMBs should have a retention strategy to help generate word of mouth and increase customer lifetime value.  

There are lots of small and large startups in the “SMB CRM” space. Most are struggling with scaling SMB acquisition. Once again, Groupon's immense sales platform can be the channel with which to achieve market penetration in this category. Startups founded more recently are focused on leveraging social platforms like Facebook and Twitter to manage relationships with customers. 

Groupon can inexpensively acquire companies like Hootsuite or Sprout Social, given the saturation in this space.  If Groupon has ambitions of acquiring revenue faster with more proven products, established companies like ZocDoc, DemandForce, or even Constant Contact are expensive but less risky bets. Combining its email marketing expertise and database with a SMB CRM platform should be a strategic imperative for Groupon.

Become A Local Mobile Ad Network

It’s been said a thousand times before: “mobile is local.”  What makes mobile application users unique is that they are looking to engage with their local surroundings.  Yet there still isn’t a mobile ad network of scale that has truly taken advantage of location as its main competitive strategy. (AT&T has taken a big first step in this direction.).

The proliferation of local mobile apps combined with the lack of local mobile monetization options creates a huge opportunity in mobile local advertising for Groupon to exploit.  As with email marketing, display advertising also lives and dies on the ability to discern user intent.  While Groupon has yet to crack the nut on intent (with its Smart Deal initiative), it does have a large inventory of heavily discounted offers that can compensate for lack of intent. By turning offers into targeted advertising, Groupon can quickly create a mobile local ad network.  

It can enter the space easily by acquiring technology from the multitude of sub-scale startups in this space (as eBay did with Where, Inc.) or partner with a horizontal mobile ad network to build a local specific mobile ad network. The hurdle is how to seamlessly enable payment and close the redemption loop on a smartphone (CPM is not a long-term business model for local display), which brings us to the next opportunity.    

Get Into The Mobile Payment Business 

This is perhaps the riskiest market for Groupon to enter, but also the largest of Groupon’s various opportunities.  It's no secret that companies like Google, MasterCard, American Express, Visa and ISIS are betting on offers/deals as the killer application to drive adoption for their technologies.  Square is also betting a significant portion of its long-term business model around offers.

Groupon has the option of simply being an offer provider for these companies or become a mobile payments company itself.  Working with issuing banks, acquiring banks, networks, merchant acquiring partners and carriers requires a completely different competency -- but no one in the current competitive space, not even Google, has the sales platform to acquire the hundreds and thousands of local offers needed to create value to the end consumer and the sales force to enable the tedious task of selling and installing new payment terminals.   

Logically, Groupon should use its highly priced stock to acquire expertise in the payments industry. The problem is that Square is really the only company with scale (and Square is better described as a “mobile acceptance” company with ambitions in “mobile payments”), while the rest of the industry is littered with startups with half-baked concepts going up against even bigger companies than Groupon.  Given the current state of the market, I believe Groupon will partner with mobile payments companies first and quickly move up the value chain at the first sign of traction through an acquisition.

Groupon is an ambitious company shouldering unrealistic expectations of continued growth. With hundreds of millions of dollars in the bank, it is most likely actively pursuing all of the options mentioned above.  It has taken Google almost 10 years to move beyond search (i.e., display, video, Android). That Groupon would need to find a second act within five years of starting its original business is both a testament to its impressive historical growth, as well as the fragility of its core business model.

1 comment about "Groupon Is Hitting the Wall: Does It Have A Future Beyond Daily Deals? ".
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  1. Ted Rubin from The Rubin Organization / Return on Relationship, December 14, 2011 at 6:06 p.m.

    The business model is not fragile, that implies that it works... the business model is totally broken and merely fosters exponential growth by using investors money to enable huge losses. I understand they have a huge database, but being the "king" of selling products at a loss(???)... still scratching my head that we are back at web 1.0.

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