Groupon: the Internet 2.0 Webvan?

[c1ue]

Groupon has filed its S1 in preparation for its attempted IPO:

http://www.sec.gov/Archives/edgar/da...203913zs-1.htm

Here are its financials from said filing:

				Year Ended December 31,									Three Months Ended March 31,
				2008			2009			2010			2010			2011
													(unaudited)			(unaudited)
				(dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue				$	94		$	30,471		$	713,365		$	44,236		$	644,728
Cost of revenue					89			19,542			433,411			24,251			374,728
Gross profit					5			10,929			279,954			19,985			270,000
Operating expenses:
	Marketing				163			4,548			263,202			3,988			208,209
	Selling, general and administrative				1,474			7,458			233,913			7,426			178,939
	Acquisition-related				—			—			203,183			—			—
		Total operating expenses			1,637			12,006			700,298			11,414			387,148
(Loss) income from operations					(1,632	)		(1,077	)		(420,344	)		8,571			(117,148	)
Interest and other income (expense), net					90			(16	)		284			3			1,060
Equity-method investment activity, net of tax					—			—			—			—			(882	)
(Loss) income before provision for income taxes					(1,542	)		(1,093	)		(420,060	)		8,574			(116,970	)
Provision (benefit) for income taxes					—			248			(6,674	)		23			(3,079	)
Net loss (income)					(1,542	)		(1,341	)		(413,386	)		8,551			(113,891	)
Less: Net loss attributable to noncontrolling interests					—			—			23,746			—			11,223
Net (loss) income attributable to Groupon, Inc.					(1,542	)		(1,341	)		(389,640	)		8,551			(102,668	)
Dividends on preferred stock					(277	)		(5,575	)		(1,362	)		(523	)		—
Redemption of preferred stock in excess of carrying value					—			—			(52,893	)		—			(34,327	)
Adjustment of redeemable noncontrolling interests to redemption value					—			—			(12,425	)		—			(9,485	)
Preferred stock distributions					(339	)		—			—			—			—
Net (loss) income attributable to common stockholders				$	(2,158	)	$	(6,916	)	$	(456,320	)	$	8,028		$	(146,480	)
Net (loss) income per share
	Basic			$	(0.01	)	$	(0.04	)	$	(2.66	)	$	0.03		$	(0.95	)
	Diluted			$	(0.01	)	$	(0.04	)	$	(2.66	)	$	0.03		$	(0.95	)
Weighted average number of shares outstanding
	Basic				166,738,129			168,604,142			171,349,386			172,966,829			153,924,706
	Diluted				166,738,129			168,604,142			171,349,386			245,962,571			153,924,706

$420 million dollars in losses in one year? On $713 million revenue?

Even removing the $203 million in acquisition expenses, this is damned impressive.

[Munger]

Re: Groupon: the Internet 2.0 Webvan?

Techcrunch has been doing a very interesting (and scathing) series of articles on Groupon. This is one (there are 3 or 4 more):

Why Groupon Is Poised For Collapse

Rocky Agrawal
Jun 13, 2011

Editor’s note:This guest post is part of an in-depth series looking at the daily deal industry written by Rocky Agrawal, an entrepreneur who has worked on local products since 1995. Read Part I, Part II, and Part III also. He blogs at reDesign and Tweets @rakeshlobster.



Imagine you’re a small business owner. You have to choose between two propositions:

1. You can pay $62,500 for marketing. You’ll get a whole lot of customers coming through your door. No guarantees if they will ever come back, but they’ll come once.
2. I’ll pay you $21,000. You get $7,000 in about 5 days, another $7,000 in 30 days and the remainder in 60 days. In exchange, you’ll give my customers cheap products for the next year.

I’ve been working on local for a long time and I know it’s hard to get small businesses to spend money on advertising. Really hard. Even getting $200 a month ($2,400 a year) is a high hurdle to meet.

There’s no way a business will sign up for #1. Most merchants would laugh you out of the store if you asked for $60,000.

Except they are. In droves.

Although they sound completely different, #1 and #2 are really the same—it’s the Groupon business model.

Businesses are being sold incredibly expensive advertising campaigns that are disguised as “no risk” ways to acquire new customers. In reality, there’s a lot of risk. With a newspaper ad, the maximum you can lose is the amount you paid for the ad. With Groupon, your potential losses can increase with every Groupon customer who walks through the door and put the existence of your business at risk.

Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business. The $21,000 that the business in this example gets for running a Groupon is essentially a very, very expensive loan. They get the cash up front, but pay for it with deep discounts over time. (This post applies to Groupon operations in the United States and Canada; it’s different in other parts of the world.)

In many cases, running a Groupon can be a terrible financial decision for merchants. Groupon’s financials also raise questions about its ongoing viability. Buying Groupon stock could be as bad a deal for investors as running a Groupon offer is for merchants. This is my opinion, but I have some facts to back it up.

Traffic is not necessarily profitable traffic

Groupon can clearly deliver customers. But in order to know if it makes financial sense as a customer acquisition tool, merchants need to know two key numbers:

1. The proportion of Groupon customers who are already their customers
2. How often new customers come back.

The higher the first number, the worse their deal will perform. The higher the second number, the better their deal does.

But for most businesses, these critical numbers are impossible to know. Groupons haven’t been out long enough to generate this data. And Groupon’s tracking methods aren’t collecting this data. (My intuition is that Groupon doesn’t want to know.)

Groupon touts a win-win proposition. But the reality is that Groupon usually wins and merchants usually lose. The merchant agreement is one of the most lopsided I’ve seen.

It’s rare that Groupon loses . . . until merchants figure out how to cheat.

The hidden auction

Underlying Groupon’s success is an auction. It’s not explicit, like Google’s AdWords bidding platform, but the economic effects are similar. The fact that Groupon runs daily deals creates artificial scarcity and drives up pricing to absurd levels. Even with four deals a day in a given market, you’re talking about fewer than 1,500 deals a year.

The “bid” in this auction is the total revenue that goes to Groupon. That’s a function of the value of the voucher, the negotiated revenue share and the number of deals that will be sold. The number of deals that will be sold is a function of, among other factors, how deep a discount and how commonly needed the product is. The larger the discount, the greater the volume.

All of this creates an incentive to drive up Groupon’s revenues. It also provides an incentive for salespeople to sell bigger and bigger deals, some of which might not be suitable for a small business. Because of all the hype around Groupon, salespeople are able to use the “Who’s Who” model—sell what an honor it is to be specially selected to be featured on Groupon.

Groupon’s process for selecting which deals it runs has little transparency. It’s not always the highest bids that win; sometimes, lower value bids win just to keep subscribers opening their emails. (In this case, think of merchants bidding with discounts, so the deeper the discount, the higher the bid). I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon.

Cash is king

Many small businesses are struggling for cash and the Groupon sales pitch resonates. Marketing with no upfront payment. You get cash within days. A steady stream of customers. This is not a new idea. Rewards Network has been offering restaurants cash upfront in exchange for discounted meals over time. (But on more generous terms than Groupon.)

Groupon’s S-1 calls tough economic times a risk; but the recession was really their opportunity. As other forms of credit dried up, struggling businesses jumped at the chance to get cash now in exchange for discounting their product later. The real risk for Groupon is that the economy improves to the point that businesses don’t have to resort to deep discounting.

Repeat Groupon businesses

Some of the analysis of Groupon’s long term prospects has pointed to repeat Groupon offers from merchants as evidence of a viable long-term model.



How can a repeat customer be bad, right? For a Groupon merchant, a repeat customer is a great thing. But for Groupon itself, a repeat customer can be a sign of trouble ahead.

I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers.

A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one.

That makes perfect sense. Revenue from subsequent daily deals help pay for the obligations created by the first one.

Receipts look like the one at right. Lots of product going out, staff to pay and little cash coming in. Taking out another Groupon loan is a quick fix. (If I were a sales rep, I’d have that date marked on my calendar for follow up. “I know we did 50/50 last time, but I’m thinking Groupon gets 70% this time.”)

Hacking Groupon

How would you exploit an overpriced loan? Don’t pay it back.

Assume that you’re a business that is unscrupulous and you’re looking to make a quick buck. You could create a wildly generous deal that would sell like crazy. In about 30 days, you’ll have 2/3 of your share of the deal. Then you shut down operations.

It also works for businesses that are just having a tough time. As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt. I strongly encourage every business that is about to go under to call Groupon. (Don’t tell them Rocky sent you.) It makes total financial sense—as a Hail Mary play. If you’re lucky, the upfront cash will be enough to help you stay afloat. If not, well, you were already going out of business. It may be your best option. In the short term, you’re actually helping Groupon because they’re being valued on revenue and no one is taking into account risk.

Groupon is essentially holding a portfolio of loans backed by the receivables of small businesses. If a business goes under, consumers will come back to Groupon for their money back. Unless Groupon is actually doing credit assessments on businesses that it chooses to feature, this is a big risk for Groupon.

The onerous terms for participating in Groupon also create an adverse selection problem. The most successful businesses don’t need Groupon for customer acquisition or financing.

The assumption is that nothing will go wrong and all of these “loans” will be paid back. (At least the subprime mortgage lenders were able to sell that risk off to Wall Street and AIG.)

Like the mortgage lenders, Groupon doesn’t know exactly how much risk it has piled up. Because some merchants track redemptions on paper, Groupon has no way of knowing how many unredeemed Groupons are outstanding. If a business goes under and the records are unavailable, every buyer of that Groupon could try to make a claim against it. (The risk is mitigated by the fact that a lot of redemption occurs within the first 60 days, but we don’t know how much.)

Google, with more than $36 billion in cash on hand, is uncomfortable enough with that risk that it dumps it onto Google Offers buyers. Groupon could mitigate this risk by changing its terms and conditions so that the consumer is responsible in case a merchant goes bankrupt.

Relying on float

Where does Groupon get all the money to give to these merchants? Credit cards—yours. Groupon gets paid within a couple of days by its banks. It then takes that money and gives it to the merchant in three chunks. From Groupon’s S-1:

Our merchant payment terms and revenue growth have provided us with operating cash flow to fund our working capital needs. Our merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date. In North America, we typically pay our merchants in installments within sixty days after the Groupon is sold.

We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs. If we offer our merchants more favorable or accelerated payment terms or our revenue does not continue to grow in the future, our operating cash flow and results of operations could be adversely impacted and we may have to seek alternative financing to fund our working capital needs.

Translation: They’re using money from new deals to pay for previous deals. They need to keep growing revenue. As of March 31, they owed merchants $290.7 million.

In the agreement I’ve seen, the first installment is 33% in 5 days. If they have to pay merchants faster, that could lead to problems.

And Google might force that to happen. According to Google Offers’ payment terms, merchants receive 80% of their share in 4 days—more than twice as much, 1 day earlier.

There’s no way that was an accident.

If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants.

Now here’s the crazy part. Not only is Groupon effectively giving loans to merchants, but it also works the other way around. The merchant is on the hook for the entire value of those deals until Groupon pays the merchant back its portion. Unlike other loan providers, the merchant is making a short-term loan to Groupon. (Not technically, but effectively.) They buy inventory in advance of the Groupon run. They also serve the initial rush of customers. The business is in a hole before they get their 30- and 60-day Groupon payouts.

While the chances might be small, Groupon merchants should know that they’re taking on the risk of Groupon’s collapse. If Groupon collapses, a lot of small merchants could be left holding the bag.

This article and more can be found here:
http://techcrunch.com/2011/06/13/why...-for-collapse/

[reggie]

Re: Groupon: the Internet 2.0 Webvan?

Groupon: the Internet 2.0 Webvan?

Ha, you got this one right. These were my exact words to a financier in March 2010.

[lakedaemonian]

Re: Groupon: the Internet 2.0 Webvan?

I was thinking Kozmo.com or Boo.com as well

As a small business owner, I've been approached numerous times by both our local Groupon clones as well as small business owner peers asking my opinion of them.

In a nutshell, I've always looked at them(based on the internet intemediary's excessive cut) as just another means of selling a dollar for fifty cents and have encouraged my small business peers to run, not walk, away.

ANYONE can sell a dollar for fifty cents until they run out of money.

I honestly had not seen beyond the excessive margins charged by Groupon and it's clones to see the Ponzi/Pyramid loan scheme.

Unless Groupon is quick to achieve sufficient scale and a sustainable digital moat around it's biz while also reducing it's own proportional overhead costs and margin costs to customers then the risk of Groupon turning into an internet loan shark dirty bomb is reasonably high.

It certainly looks like Google's $6 billion offer might have been the deal to take......but Groupon's shareholders probably had Facebook valuation dreams in their heads.

As far as Google goes and their "do no evil"......they seem to be acting like a Columbian Drug Cartel......take our money or we murder you and your entire family...your choice.

Meh...what do I know....I left Amazon.com in 2000 at cashed out at a time the company was spending enormous amounts of precious cash on logistics/distribution build out as well as crazy acquisitions using cash from Euro denominated convertible bonds that went the wrong way for a bit....I didn't think they'd make it over the hump leading up to and after 9/11....so the jury is out on Groupon....but it certainly looks shaky.

[lektrode]

Re: Groupon: the Internet 2.0 Webvan?

... just another means of selling a dollar for fifty cents and have encouraged my small business peers to run, not walk, away.

ANYONE can sell a dollar for fifty cents until they run out of money.

I honestly had not seen beyond the excessive margins charged by Groupon and it's clones to see the Ponzi/Pyramid loan scheme....

so the jury is out on Groupon....but it certainly looks shaky.

it also appears that the newspapers are intending on eating their lunch, or at least not allowing groupon to eat any more of the newspapers; ie: eye see several that are setting up their own versions of groupon, with their websites coupled with print adverts

[Slimprofits]

Re: Groupon: the Internet 2.0 Webvan?

http://www.usatoday.com/money/news/r...ter/50207872/1

Daily-deals sites took a hit this summer, according to three online research companies.

Overall visits to the sites were down 25% last week compared with the second week in June, says Web tracker Experian Hitwise. Research from analytic company Compete showed Groupon had its first month-over-month drop in traffic this year in July, while tracker ComScore said this week that both Groupon and LivingSocial were down last week from their top weeks in June.

•Experian says Groupon visits were down 50% last week from the second week of June, its peak week this year, and LivingSocial saw a 27% increase in visits.

•Compete says Groupon saw just an 8.9% decline in visits last month. LivingSocial, Compete says, saw a much bigger decline of 28%.

•ComScore's data show that unique visits to Groupon were down 22% last week compared with its peak week beginning June 12, while LivingSocial's visits were off 54% for the same period.

Groupon, which is preparing for an initial public stock offering, would not comment.

"With so many new entrants saturating the daily-deals space, deal fatigue may be setting in with consumers," says Matt Pace, Compete's managing director of retail and consumer products.

[CanuckinTX]

Re: Groupon: the Internet 2.0 Webvan?

Everyone and their dog is getting into this now. A friend of mine told me she 'got a new job' the other day with Deal site "Juice in the City". I checked into it a bit and found out all she is is a sales rep trying to sign up merchants for deals. Their angle is they market to Moms by other Moms who write up about local businesses and all the cool stuff Moms can do their. Apparently they get 'up to 10%' of the sales if they secure a deal.

Basically they're bringing the Mary Kay model to the deal sales market. I think the last line about deal fatigue is dead on.

[Adeptus]

Re: Groupon: the Internet 2.0 Webvan?

My wife, who is more thrifty than even I, is a certified Groupon shop-a-holic. More specifically, she is also signed up with Living Social, SwarmJam, Ethic Deal, and about 2 or 3 other ones whose names escape me now. We were buying so many deals that we had to get a binder to store them all, and sort them in order of date of expiry. We buy 80% restaurant deals, and then the rest is oddball stuff like Yoga passes, print canvas photography deals, hair cuts for her - mostly stuff we would otherwise spend money on anyway; except on the restaurant front, we go out about 3 times more than we ever used to. That said, it's still only 3 or 4 times per month.

The pattern I've been able to observe is that over time there's less and less good deals out there of existing established businesses. I do still see new businesses in town that are just starting up signing up. My city of 350,000 only has so many restaurants and spas, and while I did see the same restaurants actually sign up with 2 or even 3 of these copy cat companies; we've also noticed the type of good deals are now fading away and in some cases aren't even deals at all. My anectdotal experience is that the first year of Groupon was really great. I mean we were buying 2 out of 5 deals they were offering! Now we buy one out of 20 or 30 deals. The good stuff just isn't there anymore. We got lucky with a few of the copy cats as they entered the market they offered a few of the same deals we liked the first time around, so we bought more. I've also seen several times recently where the sly merchant jacks up their official price of some good or service, and then signs up with these Groupons and that way their 50% loss, is more like 10 or 20% .

Case in point, late last year back my wife had signed up for an overnight stay in a hotel in a nearby city for a long weekend this summer that even on their website advertised it cost $185/night during the season we wanted to stay there. We got the deal for $90 and thought it was great. A month or so ago when we finally got a chance to go on our mini-vacation, as we pulled up for the hotel, we felt a bit screwed as a huge sign outside advertized the rooms for $95/night - no mention of $185 anywhere. So we saved a measely $5! For $5, I would have preffered to drive around to a couple of nearby hotels and pick the best place we liked. At least one other one was within $10 of the price range. I've also seen this with car Oil change deals, Spa deals, and other services where the margin can be easily jacked up temporarily.

So between the recent shady deals of fake discounts + reduction in quality deals due to business' learning from their mistakes + market saturation with new Groupon competitors, unless something changes, it looks to me like this concept will eventually descend and devalue.

If Groupon doesn't IPO ASAP, they may lose out on their opportunity to raise cash to re-invent themselves, because I can't see businesses throwing away 50% of their margin continously.

[Slimprofits]

Re: Groupon: the Internet 2.0 Webvan?

yes, for anectdotal evidence, one of my friends that loves these sites says:

I’m not surprised. They are offering less attractive deals…..so I’ve lost some interest……..

[lakedaemonian]

Re: Groupon: the Internet 2.0 Webvan?

I've seen it from the small business side.

Some peers were absolutely sold on/convinced it will bring in a huge amount of business.

And it does.......but at a HUGE cost(margin) as the deal seekers hoover up your product/service.

Trying to develop a relationship between the business and the horde of locusts is often extremely difficult as the locusts are price focused rather than product or service quality focused.

And what about the initial tainting of the relationship?

Even IF you can convert a couple of the locusts to return to purchase again the relationship has been tainted with the significant discount...hindering the chance of the locust ever returning to pay full price.

The business model is simply TOO expensive and likely produces a counterproductive response for the small business marketing & advertising dollar spent.

I think this model, or something like it, works best for excess capacity and/or old inventory...but then that's just an old school liquidator with a web face.

[thriftyandboringinohio]

Re: Groupon: the Internet 2.0 Webvan?

I once owned an engineering consulting firm with a couple partners, and one evening we decided to never lose another job on price.
Our business quickly found itself with a collection of cheapskates and chiselers for clients.
They were awful to work with - never happy, slow pay, charge-backs for the slightest annoyance...

We put our prices back and were glad to see them go elsewhere.

[jimmygu3]

Re: Groupon: the Internet 2.0 Webvan?

http://www.usatoday.com/money/news/r...ter/50207872/1

Daily-deals sites took a hit this summer, according to three online research companies.

Overall visits to the sites were down 25% last week compared with the second week in June, says Web tracker Experian Hitwise. Research from analytic company Compete showed Groupon had its first month-over-month drop in traffic this year in July, while tracker ComScore said this week that both Groupon and LivingSocial were down last week from their top weeks in June.

•Experian says Groupon visits were down 50% last week from the second week of June, its peak week this year, and LivingSocial saw a 27% increase in visits.

•Compete says Groupon saw just an 8.9% decline in visits last month. LivingSocial, Compete says, saw a much bigger decline of 28%.

•ComScore's data show that unique visits to Groupon were down 22% last week compared with its peak week beginning June 12, while LivingSocial's visits were off 54% for the same period.

Groupon, which is preparing for an initial public stock offering, would not comment.

"With so many new entrants saturating the daily-deals space, deal fatigue may be setting in with consumers," says Matt Pace, Compete's managing director of retail and consumer products.

I used to use Groupon and LivingSocial a lot. Then Scoutmob came to Atlanta. As a consumer, you don't have to buy anything upfront. They just have a phone app with a listing of restaurants offering 50% off. No restrictions other than a "max discount" and one-time usage per restaurant per phone. It makes Groupon irrelevant to me. Not sure what Scoutmob's cost to merchants is. They recently expanded from 3 cities up to 13, with 7 more on the way. IMO, Groupon will get killed wherever Scoutmob goes.

-Jimmy

[Guest]

Re: Groupon: the Internet 2.0 Webvan?

My wife, who is more thrifty than even I, is a certified Groupon shop-a-holic. More specifically, she is also signed up with Living Social, SwarmJam, Ethic Deal, and about 2 or 3 other ones whose names escape me now. We were buying so many deals that we had to get a binder to store them all, and sort them in order of date of expiry. We buy 80% restaurant deals, and then the rest is oddball stuff like Yoga passes, print canvas photography deals, hair cuts for her - mostly stuff we would otherwise spend money on anyway; except on the restaurant front, we go out about 3 times more than we ever used to. That said, it's still only 3 or 4 times per month.

The pattern I've been able to observe is that over time there's less and less good deals out there of existing established businesses. I do still see new businesses in town that are just starting up signing up. My city of 350,000 only has so many restaurants and spas, and while I did see the same restaurants actually sign up with 2 or even 3 of these copy cat companies; we've also noticed the type of good deals are now fading away and in some cases aren't even deals at all. My anectdotal experience is that the first year of Groupon was really great. I mean we were buying 2 out of 5 deals they were offering! Now we buy one out of 20 or 30 deals. The good stuff just isn't there anymore. We got lucky with a few of the copy cats as they entered the market they offered a few of the same deals we liked the first time around, so we bought more. I've also seen several times recently where the sly merchant jacks up their official price of some good or service, and then signs up with these Groupons and that way their 50% loss, is more like 10 or 20% .

Case in point, late last year back my wife had signed up for an overnight stay in a hotel in a nearby city for a long weekend this summer that even on their website advertised it cost $185/night during the season we wanted to stay there. We got the deal for $90 and thought it was great. A month or so ago when we finally got a chance to go on our mini-vacation, as we pulled up for the hotel, we felt a bit screwed as a huge sign outside advertized the rooms for $95/night - no mention of $185 anywhere. So we saved a measely $5! For $5, I would have preffered to drive around to a couple of nearby hotels and pick the best place we liked. At least one other one was within $10 of the price range. I've also seen this with car Oil change deals, Spa deals, and other services where the margin can be easily jacked up temporarily.

So between the recent shady deals of fake discounts + reduction in quality deals due to business' learning from their mistakes + market saturation with new Groupon competitors, unless something changes, it looks to me like this concept will eventually descend and devalue.

If Groupon doesn't IPO ASAP, they may lose out on their opportunity to raise cash to re-invent themselves, because I can't see businesses throwing away 50% of their margin continously.

A couple of things come to mind:

1. Eating meals out at 50% off is still more expensive than eating at home. So if the reason for Grouponing is to eat out more, rather than cut expenses for occasional meals out, it's not saving money. It still has value, but you do eventually run out of places you want to eat who offer deals. And as our population gets poorer, this sort of spending will have to decline.

2. The type people who can easily afford to keep coming back to these very discretionary types of services it promotes w/o a coupon in hand probably don't bother with it anyway.

3. As standards of living decline it's bound to see fewer sales. These are not "50% off a month's rent on a 2br apt" or "1/2 off a week's groceries" deals. They're mostly for things like yoga lessons, meals out, and stays in creepy BnB's in towns you'll never have reason to visit.

4. Businesses with very low marginal variable costs for added patrons can make this work. Everyone else, probably not. For example, 50% off play tickets to an already 1/2 empty theater is one thing. 50% off getting your house painted would be quite different.

5. Sadly, those who created it will profit even if the company fails quickly after the IPO. This will in turn lead to more of our nation's brainpower invested in attempts at dubious BS business models in lieu of actual productive businesses being developed. Instead of the next Microsoft we'll get some flim flamy ephemeral dot.com that comes and goes within a decade or less.

[c1ue]

Re: Groupon: the Internet 2.0 Webvan?

Competition is a factor, but the biggest factor is business model.

Any lead generation service like Groupon has to be able to prove several things:

1) Reach - the bigger the better. Groupon excels in this area though the emergence of competitors means Groupon's customer acquisition expenses are rising dramatically
2) Business value - there is no question whatsoever that the 'deal' itself is anything but for the advertiser. Every business on earth loses money by cutting its margins in half; if they were so profitable with so little competition, they don't need Groupon. Over time I'd expect more and more 'daily deal' gamesmanship to arise - i.e. double prices then offer 60% off - but the base dynamic remains the same.

The gigantic question mark is just how much Groupon impacts ELR: expected lifetime return. ELR for a new customer brought by Groupon has to equal the above mentioned cost of bringing this customer in. To say this is unproven is to be charitable - and this applies to all such daily deal web sites.

[flintlock]

Re: Groupon: the Internet 2.0 Webvan?

I've seen it from the small business side.

Some peers were absolutely sold on/convinced it will bring in a huge amount of business.

And it does.......but at a HUGE cost(margin) as the deal seekers hoover up your product/service.

Trying to develop a relationship between the business and the horde of locusts is often extremely difficult as the locusts are price focused rather than product or service quality focused.

And what about the initial tainting of the relationship?

Even IF you can convert a couple of the locusts to return to purchase again the relationship has been tainted with the significant discount...hindering the chance of the locust ever returning to pay full price.

The business model is simply TOO expensive and likely produces a counterproductive response for the small business marketing & advertising dollar spent.

I think this model, or something like it, works best for excess capacity and/or old inventory...but then that's just an old school liquidator with a web face.

100% agree! I have been contacted by website/rating companies that promise great results with coupon deals they email out. All they ask is you offer a 50% discount on your services PLUS give them 50% of the revenue! So what is normally a $100 job puts a whopping $25 in my pocket. Sure I'm only losing a little, but I make it up with volume.

You obviously "get it" concerning tainting the relationship right off the bat. So many don't. In my opinion, joining the herd is not the way to compete with a small business these days. But I guess it depends on the business.