What's the Deal?

If you are like me in this new post-recession (whether you believe we are really out of it or not) world, you are looking out for a deal when you shop.  As you know, there are a number of new companies and ventures out there attempting to take advantage of this mentality, the most famous of them now being Groupon.

If you're following this emerging cluster of ventures, you know that recently GroupOn had talked about going IPO and they were bragging that their initial sale would rival any company that has gone IPO before... that is, until they had to restate their books.

http://blogs.hbr.org/cs/2011/08/groupon_doomed_by_too_much_of.html

I am a "deals site" consumer so I do pay attention to what's going on here.  I am also a business marketing professional so I'm also very fascinated by this new tactic for attracting consumers and the retailers' ambitions when choosing to do business with these companies.  I do, in some way, tend to agree with the HBR blogger's assessment.  Do I believe Groupon is growing too quickly?  Perhaps.  What is a little more disconcerting if I were a potential investor in Groupon is not that they have become too large and bloated to become profitable, but that their success in customer acquisition, margins, and market share is unsustainable.  I lean in this direction for the following reasons:

1. GroupOn, aside from its branding, is largely undifferentiated from the other deal sites that operate in its markets.  Because it HAS aggressively built a brand around itself, there are people that associate these "pre-purchase, half-off coupons" as "Groupons."  However, if I go out to LivingSocial, CrowdCut, Half Off Depot, Facebook Deals, or any other organization selling coupons such as these, I get the exact same thing that I would get with GroupOn. 
2. Since this is the case, and consumers that subscribe to deals aren't just loyal to any one site (I subscribe to all of them), the economic law of abnormal profits will eventually apply to margins in this space.  You can see this now with the more limited scopes of the deals that are being offered at restaurants.  The limits are lower and the risk thresholds are smaller.  If Groupon was making a great margin on deals offered a year ago, it stands to chance that competition has, or will, cut into those margins at some point.  
3. Ultimately, the success of a company in this space rides with it's ability to attract and sell deals to consumers.  Essentially, it is a online, retail B2C model (this is overly simplified, I know).  In this model, the deal company attracts consumers to subscribe to its news feed (either from Social Media and/or email), then uses the strength of that base to sell merchants on providing a deal via their site, in which the deal site gets paid on performance (such as, for each Groupon sold, the merchant gets a cut and Groupon gets a cut - these cuts are negotiated between the retailer and the deal provider).  However, they must sell the deals to the consumer base (that they spent lots of marketing dollars to attract) or they are ultimately not successful. 
4. In what I'm assuming is a push to increase deal (quantity) volume, deal companies appear to be going after just about anyone who waves a dollar at them to put forward a deal.  Some of the crazy deals I've seen come through the news feed definitely plant that thought in my head.  As a consumer who is not loyal to Groupon but to "Me, Inc." and a set of retailers I like will offer a deal through any number of sites, I will simply troll the plethora of deal emails for something I'm interested in and buy based on the retailer versus which channel they offered their deal through.  At some point, retailers will get smart and realize that no one cares if the deal comes through Groupon, Half Off Depot, LivingSocial, Facebook Deals, Bob's Deal Shack, or wherever... and they'll negotiate deals that will eventually put the smaller players and/or anyone that hasn't managed their costs well out of business.  My expectation is that those Social sites that have built in followership (like Google, Facebook, etc.) will eventually win out as every venture in this space eventually will have to be profitable to survive.  If Groupon may not ever turn a profit, this is a little disheartening if you're betting in this space and playing "me too."  

Do I think Groupon (or the others) are doomed?  No, not really.  However, it is not as much "easy money" as they are making themselves out to be.  Customer acquisition is hard work and expensive (especially if you don't have a built-in base); and if they can't get an ROI on that investment that will pay it back and more then the future isn't bright for them.  

What can they do....

Find a meaningful way to differentiate.  One site I did not mention here is ScoutMob, and the reason being is that their consumer strategy is different than the others.  With other sites, I as a consumer have to pre-buy an expiring coupon to take advantage of an offer.  With ScoutMob, I simply have to have the ScoutMob application on my iPhone or Android - or - request an email from ScoutMob with a coupon.  As a ScoutMob consumer, I don't pay anything until I am at the retailer and make a purchase.  This is really compelling, obviously, and at the end of the day the pull from greater consumer interaction will drive the merchants to do more business.  

Do not outgrow your profitability.  Unlike the government, you can't just increase taxes if you run a deficit... and in fact thanks to a group of pesky Republicans, the government is having some trouble doing that as well. Expansion should be done with the expectation that eventually venture capital will not be required to keep the company, or its growth, afloat.  

In Groupon's case... perhaps its time to figure out a way to get profitable given the current environment.  What was interesting is that Amazon figured out how to leverage its brand and technology platform to scale.  Perhaps if the company isn't going to be completely in the black strictly through "deals," there are other opportunities for revenue available.  Look no further than Amazon's Cloud Services as an example of how this can be done.

In the meantime, I will continue to enjoy the deals...  I love checking my ScoutMob app, and I have a few LivingSocials purchased, but I think I'll pass on an IPO until the business model has matured a little more. Just my $0.02.  

I'd love to get your thoughts.  Business folks and consumers.... Comments?