Groupon turning down Google – Why? And what does it mean?

I started this blog by posting “Rules” for startups. You can still find them somewhere around here. Those rules were my experiences-turned-blog-posts about things you should or shouldn’t do when starting a business. I posted them with the hope that I would help someone out there not make some of the same mistakes I made.

But I’d like to change rule #1 from “Get Started RIGHT NOW.” to this:

New Rule #1 for Business: If someone offers your company 1 Billion Dollars as a purchase price, you accept it. ONE Billion. And if someone offers you FIVE Billion, you don’t let them get off the phone before the contract’s have been emailed, signed, and returned.

Seriously, I think that Andrew Mason and the Groupon folks are suffering from (1) a lack of appreciation of how much money 5.3 BILLION dollars is and (2) a hubris found in most startups, a hubris that usually is the undoing of them eventually (see: Digg).

Turning down Google’s ofer signals that the Groupon folks view their company as a portal-in-the-making and not a marketplace. This is, of course, very ambitious. It’s also incredibly stupid. From the Groupon side of the table I’m sure the board laid out the following arguments:

– We are BY FAR the market leader in the Group Buying space.
– We have a bigger email list then everyone else in the space.
– We have a greater geographic presence (mostly through acquisition) then anyone else in the space.
– We are the fastest growing company in the history of the entire galaxy (or something like that).

I’m sure that the “we can be a platform!” concept is rooted in the idea that the current single-offer-per-day model can be developed to increase sell-thrus. Maybe ad some ads or sponsored listings. Keep bringing on big brands like GAP. Get in to new markets. Allow Vendors to have a place to sell coupons/vouchers whenever they want outside of the featured deal. The Groupon As A PLatform boils down to the board thinking that they can make their site a one stop shop for the intersection between online marketing and offline commerce. I applaud their ambition. But they are incorrect and it’s going to cost them. Here’s why…

The first mistake Groupon is making is in thinking that their model is worth a lick right now. As it stands, the entire Groupon platform needs a LOT of work to remain a viable business. The entire point of Groupon is to offer a voucher as a loss-leader (or at a very small amount of profit) and get new customers through the doors of a business. Andrew Mason (CEO) says that Groupon exists to get people in a community to explore new things to do in their cities. That’s of course poppycock – Groupon exists to sell whatever deals they can. There’s nothing exploratory about going to The Gap.

For starters, there is not a shred of evidence that Groupon vouchers create repeat customers. NONE. Groupon’s (and similar companys’) vouchers bring people through the doors who are there only because they think they are getting a good deal. Is it possible they will return? Perhaps. It’s also possible that instead of becoming a repeat customer at ABC Spa, they’ll simply wait for XYZ Spa to be featured on Groupon so they can save a little money on a manicure. Will the customer return? Will they tell a friend about a good experience? Did they spend enough during their visit that the vendor made a small profit? No one knows. Groupon definitely doesn’t. The merchant support tools from most every group buying site are DREADFUL or non-existent.

Aside from no evidence that Groupon creates repeat customers (which is the entire point of running a Groupon for your business), there is no way for the merchant to continue interacting with the patron in the hope that they will return as a regular customer. There is no way for the merchant to track if the campaign was a fiscal success unless they do it themselves. Furthermore, Groupon locks in merchants for 90 days as well, so if Jimmy’s Auto Shop offers a Groupon and it succeeds, Jimmy has to go to the end of the line at Groupon AND can’t run a similar campaign anywhere else for 1/4 of a year. This is similar to FOX telling Coca Cola, “if you want to advertise during ‘American Idol’ then you have to sign a contract stating you won’t advertise during this season of ‘Dancing with Stars’ over on ABC.” The ENTIRE point of brand advertising is to create frequency of impression, to actually BUILD the BRAND. How is a vendor supposed to build a brand if key player in the wonderful-world-of-group-buying is keeping the customer from extending his reach? (Groupon should be going the other way – encourage vendors to advertise on other sites. Why? Because this helps the vendor but also means more and more people in the world get exposed to group-buying and get comfortable with it. And as the Big Man On Campus, those people will eventually find Groupon and Groupon will make more money.)

So Groupon is foolish so far for two big reasons: the platform sucks for merchant tools and there is no proof that the concept of creating repeat customers is actually working. Those are two REALLY significant issues, and I would think 5.3 billion dollars would be reason enough to let those issues be someone else’s problem.

So before Groupon can think about itself as a platform, it needs to fix the myriad problems it already has. Unfortunately, the hole in the hull gets bigger when you realize that the competition Groupon is facing right now is bottom-up. Most group buying sites are copying the Groupon model exactly and trying to launch in a market or two and build up lifestyle businesses for the owners. Groupon sits at the top, king of the group buying world, mostly because a lot of their competitors are companies made up of three college kids with a Mac Book Pro – one battleship, lots of barnacles, rising tide lifts all boats yadayadayada. Why is this a problem? Well, the largest ecom web properties on earth aren’t even in the game yet (Amazon’s investment in Living Social notwithstanding). What happens when Twitter integrates daily deals in to their promoted feeds? What happens if Google buys Yelp and does the “Groupon as PLatform” idea but does it BETTER? What happens when Amazon starts opting in all of their user accounts for offline deals as well? Nevermind that the gorilla in the room (yeah, that one) has more data on more people then anyone in the history of the world. You think Zuck and company don’t see a way to print money by taking their business, which is already a PLATFORM, and leveraging it in to the group buying space?

Groupon is riding high, and they should be proud. They also should have taken Google’s money. Competition is coming from all sides. Their product and the entire market are in their infancy and there is no real reason to think that Groupon is the company best positioned to develop the group-buying system over time. The internet is littered with early market creators (Prodigy, MySpace, Alta Vista, etc.) who were eaten alive by people that came along and saw the next iteration of the idea and did it BETTER. Is Groupon the company you’d bet on to succeed as a market creator AND long term market leader? Would you bet 5.3 Billion dollars on it?

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