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There Is A Trend To Spot In Groupon’s Growth Rate

Posted on Monday, Jun 6th 2011

What is different between Groupon and all the rest of the massive Internet sites that have been in the news lately? Why have they become one of the fastest-growing companies ever?

For the purpose of this discussion, set aside the fact that they are also massively unprofitable, a reality that they will get beaten up for in the upcoming IPO. It doesn’t change the evidence that the company’s revenue growth is phenomenal.

The simple answer is their business model. To recap, they offer a discounted daily deal if a group of people buy the “groupon.” Then, they take, as compensation, a percentage of the revenues from the merchant whose deal has just been sold. Simply put, they are offering a massive channel and effective customer acquisition strategy for merchants, small and large, and for that, they charge a hefty channel fee.

To me, this is simply brilliant. It is at a level that otherwise brilliant players like Facebook, LinkedIn, Twitter, Demand Media, The Huffington Post, TechCrunch, and so on have all missed. Over the past few days, I have written extensively on a trend that stares me in the eye: Groupon Leads Adoption Of Revenue-Sharing Monetization ModelUnder-Monetized Facebook Dominates Display Ad MarketLinkedIn IPO Is A Success, But Monetization Rate Is Far Too Low, and Demand Media Also Under Monetized.

Whatever happens to Groupon in the IPO market, it has shown us something important: merchants are willing to pay heavy channel fees to acquire customers, and this truth, if used well, may represent far better business models for tomorrow’s Internet giants than the measly CPM advertising.

If you follow this logic further, let us ask:

  • Should Glam Media start using their reach to actually sell clothes, instead of just brand advertising for clothes?
  • Facebook is already the largest player in display advertising. But shouldn’t a portion of the advertising inventory be deployed on earning sales commissions for various products and services?
  • Twitter has tremendous data on what brands are being Tweeted about. Why not explore an affiliate advertising model to link some of those Tweets up to actual transactions?
  • And TechCrunch? Why not “sell” some of the products they have positive feelings about and tend to talk up?

The list could go on and on.

A major question emerges if the media industry – reeling from a business model meltdown – adopts revenue sharing as the raft that saves it from the flood. What about objective journalism? What about conflicts of interest and the role of journalism as a watchdog? What about carefully researched opinion?

These are complex questions, no doubt. A solution to journalism’s existential crisis versus a fair and nonconflicted existence. The question has arisen before as the media industry adopted advertising as its main sustenance. Why is this current question all that different?

It isn’t.

These are exciting times. John Doerr’s words, written in The Internet Is Underhyped, ring true. I think through the commercial potential of Groupon is drawing our attention to this.

Some have gone so far as to say that Groupon is a Ponzi scheme. It isn’t. Groupon is going to have to adjust its revenue sharing model and reduce the percentage it charges. But the fact remains that revenue sharing is a powerful model for performance marketing, and it is here to stay.

Please chime in with your thoughts and analysis. For further reading you can refer to some excellent pieces by Steve Cheney and Don Dodge.

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Sramana, I have been thinking, writing, and tool developing on the Daily Deal industry for a number of months now. The Coupon CPA™ is a tool to assist small business owners in determining the potential financial impact from doing a Daily Deal promotion. I don't think Daily Deals are for every small business. It is up for each owner to decide … and they should do so by engaging and preparing fully.

But that is a separate issue from questioning a Daily Deal participants valuation and/or the business model of the Daily Deal promotion industry players themselves. I appreciate you zagging while others zigging. It seems now en vogue to bash where just six months ago most press outlets seem to gush praise and love. I may not necessarily agree with you but I very much respect you swimming against the tide as it were.

Folks can check out the Coupon CPA™ blog at http://couponcpa.blogspot.com if they want to review some additional writings on Daily Deals.

Geoffrey Monday, June 6, 2011 at 6:40 AM PT

couponcpa is an invite only blog. No way to check out the coupon cpa tool or review their articles on daily deals.

Rohit Sunday, July 17, 2011 at 9:17 PM PT

Most of SMB merchants is coming to maturity that Daily Deals is not necessarily a efficient acquisition model. Here are some thoughts on the channel acquisition cost where the LTV of acquisition needs to be thoroughly analyzed : Group Value – Where Art Thou.

Also here is follow on thoughts of why fixed cost service should also be careful in blindly applying this model : Value Erosion – Prisoner's Dilemma & Defections

vvpreetham Monday, June 6, 2011 at 7:00 AM PT

Good reference to fixed cost businesses. Businesses w/ a higher degree of fixed costs can often better leverage some types of promotions but it is not a guarantee and there potential issues for sure. The issue becomes centered around Contribution Margin analysis and where the business is in covering its fixed cost nut. However, that is not even a correct analysis all the time. For example, there are very special circumstances that might need to be considered in fixed cost type special event service businesses (e.g. municipality sponsored limited time exhibitions, etc.). At first blanch, these 'businesses' seem to fit the classical high CM type business but promotional efforts need to be modeled differently potentially.

Geoffrey Monday, June 6, 2011 at 7:10 AM PT

Sramana:

Another friend of mine, Tristan Louis, a serial entrepreneur who has been around the web since the earliest days posted in his blog earlier this week about the Groupon IPO and what it may portend http://ow.ly/5fwkS . I am still trying to parse through what you have said – strong arguments as to why it is different this time – and putting it up against Tristan's argument which is also compelling saying that if history is a guide, which he believes it is, he is on the side of it signaling a bubble.

Bill

Bill Gordon Saturday, June 11, 2011 at 9:21 AM PT

A trend is a trend, bubble or not, Bill.

Just like e-commerce was a trend that has continued, despite the bubble bursting in 2000.

Online Search or advertising were also trends that continued beyond the bubble of the nineties.

Sramana Mitra Saturday, June 11, 2011 at 9:57 AM PT

hi Sramana!

Trend is a trend, bubble is determined by how many people blindly follow it. I think the point raised about the business model change is a fundamental one. And this one is very easy to miss in the points and counterpoints about IPO.
We infact recognized this a year and half ago, through http://www.vHelp.me , trying to impact the web ecommerce ecosystem through the revenue sharing monetization model. Some of trials that we have done, make us believe that its a disruptive trend, where even in online world, we are trying to achieve performance driven monetization model, while Group on is doing it on offline world.
I think GroupOn like others before them, will drive in the optimization in customer acquisition, once the growth starts to slow. Till now, I think their focus will remain on growth.
regards,
umakant

Umakant Monday, June 13, 2011 at 3:30 AM PT

Every business works on something called "ecosystem". It has to be a symbiotic relationship between all the entities for them to co-exists. Think about any business that you know has been successful – google works on this very well – the consumers, the brands and the platform all of them are beneficiaries.

Sapan Wednesday, July 13, 2011 at 10:52 PM PT

I don't get your point about Groupon et al. Affiliate revenue models have been around for many years, these are shared revenue models exactly as you describe them…

Tom Foremski Friday, July 22, 2011 at 4:39 PM PT

Exactly. And look around – they are not used by any of the big traffic sites like Yahoo! or LinkedIn or Facebook. My point is, they should be.

And Groupon's meteoric rise has given us reason to turn the spotlight on this issue.

That's all. Nothing earth-shattering. Just a subtle observation that humongous sites miss something that is right under their proverbial nose.

Sramana Mitra Friday, July 22, 2011 at 9:22 PM PT