Groupon is not a “winner take most” market.

A lot of blogger types are parroting the same silly analysis about Group Buying and Groupon. Their conclusion is: “this is a winner take most sector and Groupon is going to be the winner.”

They are wrong.

A winner-take-most market is when multiple vendors offer similar items or services yet one of them ends up with the lion’s share of the business. Group buying sites don’t work that way. Why? Because shopping for coupons is (1) not time consuming and (2) not exclusive. If Groupon has a good offer one day and Living Social does too, I might buy both. If both offers suck, I’m likely to buy neither. Absolutely NOTHING about Groupon’s daily offering is going to affect the decision of someone looking at other sites as well. Groupon may have a great offering, but that isn’t going to prevent me from buying someone else’s great offering. No one on the internet wakes up and says, “I have $20 to spend on a voucher today….only one site is getting my business!” The idea that Groupon will be a winner-take-most case is silly. If ever there were a long-tail market, group-buying is it. LOTS of daily deals companies can prosper without any one of them being more of a winner then another.

Scale gives Groupon a huge footprint. They are already in a zillion markets and a billion countries. But being big doesn’t matter this time around. While I imagine Groupon’s sales will soon enter the realm of billions on an annualized basis, I’m not sure that a company with 3,000 employees selling 3 billion a year (1 MM / employee gross) is more valuable then a company with 50 employees grossing 50 million a year. The difference is that the 50 employee company can likely be built without outside funds while Groupon can not.

I realize this rant is a bit scattered, but I think about Groupon constantly. I am partially in awe of their success because the idea is so PAINFULLY simple that anyone could do it. And I am partially horrified by their success because the idea is so PAINFULLY simple that anyone could do it.

How easily? Let’s look at the math: A Groupon clone site can be made and well-designed for about $300. A sales force of two or three people in a market working commission-only (say, 30% of net from the merchants they book) could be assembled in a matter of days. Facebook connect and Twitter integration make it so that starting with 100 people paying attention could quickly mushroom to a mailing list of 10,000. Using the average low sell-through rate of group buying sites (about 2% on average), that would result in 200 sales per day. Assume an average voucher price of $20 with half going to the merchant and PRESTO your little project is making $2k a day. $600 to the salesperson leaves you with $1400 a day or just right around half a million bucks a year. Put it in 4 markets located near each other to facilitate central-management (Houston, DFW, Austin, San Antonio..?) and you’ve put a dozen people to work and grossed $2 million on the year. On paper, it isn’t all that difficult….which is why Groupon is facing THOUSANDS of competitors.

This is not a winner-take-most market. Groupon is going to make a lot of money. SO are THOUSANDS of competitors around the world.

THat said, this could be a winner take most market if only Groupon (or someone else) would integrate a number of tech mechanics that are already readily available and reliably proven. How? You think I’d tell you? I’m saving that one for myself…

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One Response

  1. It takes about $300 to start-up a groupon clone and this is fostering the the exponential growth in the number of clones. Soon their will not be hundreds but thousands of clones all offering daily deals. Now the consumer has many, many choices, and can go day to day just buying from the groupons. So how does a merchant that participates in a groupon make money as they will be only be able to if it is half price. Does that mean in the future the prices will be doubled so they can in turn be cut in half to do a groupon? If this is the case, how will the merchants be able to make a profit to continue to subsidize future groupons. This business model just doesn’t makes over a long period of time, say two to three years from today. How does the merchant win doing a groupon? Today, Groupon and the clones win and so do the customers. Remember – No Merchant – No groupon!

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