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Friday, December 03, 2010

Groupon CEO Andrew Mason Has Huge Balls

The headline tonight is "Groupon Said To Reject Google's Offer."  Wowza.  First, a little background for the uninformed:  Groupon is a localized online coupon site.  They solicit retailers in various metropolitan cities, inducing them to offer deals which Groupon markets to their audience of eager bargain hunters.  Each deal has a minimum required interest level (which is almost always met, as far as I know), and Groupon takes 50% of the coupon value.  Thus, if a vendor offers $50 worth of merchandise for $25, they're really selling at a 75% discount because they also pay Groupon half of the $25 as a fee.  

Groupon's revenue is said to be running at a $1b/yr pace, and they have over 35mm users.  Google reportedly offered them upwards of $6B - a pretty impressive sum for this company that's less than 3 years old.

There are lots of tech companies out there where people say "There are no barriers to entry - that company is doomed to fail."  Now, in tech, although the lack of barrier to entry part is frequently true, or mostly true, the doomed to fail conclusion is frequently false.  People make the same argument about NFLX (which has debatable barrier to entry (content required) and is probably not doomed to fail, yet is likely over priced), OPEN (which I think has more barrier to entry than people think, and yet is probably not doomed to fail, yet is likely overpriced), but I think the "no barriers to entry" thesis in Groupon is a pretty sound one.  In fact, the best part about their business model is that it wasn't even really their idea - Amazon Gold Box and WOOT pioneered the daily deal phenomenon - but Groupon made it local, which turned out to be especially viral.

I mean no offense to Groupon's users - if they covered my 'hood I'd use them too - but Groupon's asset is their base of 35mm of the worst type of customers a business could ask for - serial deal whores.  Yes folks - admit it - if you're the type of person who is patronizing a merchant only because you got a coupon, you're also the hardest type of consumer to convert into a repeat full paying customer - which is the merchant's goal, of course.

If I were Google, I'd buy Craigslist for a fraction of that $6B, take local to the extreme, cut the massive 50% vig that Groupon takes for itself, and eat their business by competing with Groupon on price (note to Sergey Brin - you can give me 5% and use my idea - email me).

In any case, Andrew Mason, the CEO of Groupon, has some serious balls.  If I were in his shoes, I know what I'd be screaming at the top of my lungs if Sergey Brin came calling:  SOLD TO YOU SUCKA!

disclosure: I have no positions in any of the mentioned companies

-KD

note:  here's an analysis of Groupon's value from the point of view of a merchant, and here's an analysis from one of Groupon's smaller competitors.

14 comments:

Anonymous said...

i've heard different things regarding their customer base - i use the service all the time, use what i can and rarely go back to the merchant. but i know an upscale restaurant owner who said everyone who came in spent way more then the coupon amount and has had repeat business.

Kid Dynamite said...

anon - of course they have to get some repeat business - I didn't mean to imply that they get none. But by nature, Groupon is targeting a relatively less-desirable type of customer - that's all i meant

Anonymous said...

i absolutely agree. i think their is a certain pricepoint at which it makes sense for the retailer and certain areas where you will get killed. For example i purchased 5 trips to a yoga studio for $25. There was no incremental cost to them and it will bring in some new customers. For restaurants the key is pricepoint - if a high end restaurant does a $30 of food for $15 and the average dinner entree is $25 most people are going to go with a significant other and spend $75 so the restaurant does pretty well - this was the case where I knew the restaurant owners and she did well. Small discount, high average check.

Best Groupon ever just happened - $50 at Nordstrom Rack for $25. I bought 3.

scharfy said...

Kind of refreshing for these guys to turn down the deal and keep on building their baby. Very Google-like behavior actually. Eschewing the easy buck, and continuing on the 'mission'

Anyway - whatever happens, even if its ends up being a bad financial move, I like the attitude.

I'm sure a lot of lower level people were praying for the payday, but - would sergey and larry have sold google after 2 years to Microsoft or somebody sitting on cash?

I doubt it.

Game on.. for now

Anonymous said...

The price Google was rumored to pay was what, one quarter's pocket change to Google?

Sold to you sucker?... That's what most said about Goo's Youtube purchase.

And, who's sucking now, bitches?

-HR Dobbs

Kid Dynamite said...

Dobbs - is Youtube worth more than what GOOG paid for it? They still have no clue how to monetize it... I didn't think it was any sort of slam dunk purchase for them so far.

Anonymous said...

I would have pulled the trigger on that sale so fast and been on a yacht littered w/hookers and blow so fast your head would spin.

Brian said...

I can't believe groupon turned this deal down. I tend to agree with those that think there is a low barrier to entry.

I've spoken with someone who is
familiar with the deal (or lack there of at this point). He said what groupon comes to the table with is the 2,000 (or mabybe 20k) strong sales force that knows the other half of the problem that the Silicon Valley guys don't: the people who own the local restaurants/businesses. I have a very low opinion of sales people in general, but his opinion may have some weight.

On the other hand, I can see how Facebook could leverage their huge user base to create a FacePoun pretty quickly. I'm sure almost all of the local restaurant/business owners who would use groupon also have facebook accounts. The amount of relevant facetime (no pun intended) a coupon would get on Facebook would significantly out weigh the lack of a good "salesforce" IMHO. Its almost like the old Netscape / Internet Explorer thing. Facebook controls what a lot of people see everyday/hour/second so if/when they get in the game, everything will change.

Kid Dynamite said...

Brian - I very much agree about Facebook, and I want to clarify that Groupon's salesforce sells Groupon to the merchants - it doesn't sell the deals to Groupon's users...

Brian said...

Another thing that groupon and their wannabe competitors seem to think is valuable is their intellectual property:

http://www.bloomberg.com/news/2010-12-03/groupon-ipcom-nokia-bayer-icann-intellectual-property.html

"Closely held Ewinwin Inc., based in Tampa, said it has been operating since 1999 and maintains a site where businesses promote their products and set prices based on the number of customers who place orders."

Our patent system is a complete joke. Some how these people seem to have patented the laws of supply and demand that have been existence for eternity. WTF.

Brian said...

Oh and this guy is suing groupon for stealing his "new idea" about this fabulous invention called wholesale:

http://www.bizjournals.com/tampabay/news/2010/12/03/ewinwin-sues-groupon-for-patent.html

emphasis mine:

The company’s founder is Gregory Mesaros, whom the lawsuit said is considered by many to be the definitive expert on the applied theories of demand aggregation, group buying and dynamic pricing. Mesaros founded the company based on the idea that grouping buyers, as well as competitors, together to achieve economies of scale benefitted everyone in the supply chain, the suit said.

Anonymous said...

Kid,

Investing in a service like Youtube is all about the long term cash flow. And Goo is currently getting a better return than if they had the 1.6 bil in the bank.

Gregg said...

Groupon, LivingSocial and our local paper all offer a daily deal email where I am. I honestly look at all 3 (and honestly, because I've bought from all 3 have 3 separate emails coming from each of them). The deals are comparable (with Groupon having national/online deals while the other 2 are truly local) and I don't distinguish between them. I generally buy those from places I know, though I have a twinge of regret using a discount at a place I frequent.

My point is the barrier to entry is low, but the opportunity to scale like Groupon has is limited. The utility of it will get diluted over time. My secondary point is how many of those "active user" numbers are duplicate email addresses like mine?

justafed said...

My wife thinks Groupon is the best thing ever, which surprised me because she isn't usually wrapped up in all of the hot trends. That was enough to make me wonder what the possibilities were. If they really are getting some highly customized offers out there that people AREN'T ignoring,

So I signed up, describing myself as a 40-something male in our huge metro area. My initial offers were: knitting supplies, $50 off my next manicure/pedicure, and half-price pole-dancing lessons. I am not making this up.

I think try should taken the $6 billlion.