Groupon’s Secret Weapon – the local advertising GDS

Many have argued that local deal juggernaut, Groupon, is not a defensible business.  How many blog posts have we seen that exhort how Groupon was insane to pass on the reported $6 billion dollar take-out bid from Google.  Heck, reports are that they are worth $25 billion.  I think the casual observer will start to have some semblance to where they are going with there “easy to replicate” busines model.  Take a look at the latest addition to Groupon’s business model called, Groupon Now.  Call it version 2.0 of their existing small merchant couponing business model.  They are going to allow merchants to more effectively yield manager their businesses by allowing the merchant to decide when to provide incentives for new and existing customers.  Groupon has such wide customer scale that they can offer small merchants immediate access to inventory that is not being currently maximized.  For example, a bar can provide incredible real-time deals as offers during the middle of the weekend versus the prime trafficked period likes Friday and Saturday.

I believe what Groupon is doing is nothing short of creating an incredibly powerful merchant platform.  It reminds of some of the business parallels in the travel industry.  Historically, the businesses that had lots of critical demand (enough scale to move meaningful amounts of consumer volume) ended up being the market makers.  They made a lot of money in the middle – between the supplier and the consumer.  In the golden age of travel, every travel agent used what was called a global distribution system (or GDS).  The GDS’es were originally owned by the airlines and they effectively slotted their own air inventory at the top of the sort order for travel agents.  This continued until the government got involved and de-regulated the GDS’es in order to provide more competition and consumer benefit.  The new cadre of GDS’es started to flourish largely driven by the predominance of e-commerce popularity and the shifting tides of consumers armed with the tools to make their own booking decisions without a middleman.  Expedia led the charge by building their own set of hotel inventory that didn’t use a GDS – Expedia in essence built a high margin database for hotels to more effectively manage their perishable inventory.  I was at Expedia right as the phenomenal early founders of the company rolled out their merchant hotel programs which led to many years of high margin, value-adding inventory to millions of consumers.

Groupon is doing something similar but I think the implications of this is much, much bigger.  The local advertising market is extremely fragmented.  Much more than the $3 trillion travel and hospitality industry.  Many companies have tried to break-thru to reach small businesses and Groupon’s ability to offer e-commerce to businesses that were not sophisticated enough to do so was and is simply brilliant.  I think Groupon sees the bigger picture.  Look at this interesting chart found that shows the distribution of Groupon’s deals by price and volume.  Now this is the proverbial long-tail of merchants.  Groupon has the cash, the leadership, and the scale.  Hello to the new local advertising GDS.

Comments

[Chris Treadaway]

Just now catching this post -- interesting thoughts. But I think you're giving Groupon too much credit for adapting their business model in the future for the next evolution. A lot of companies fail to innovate when they are forced to choose between the old business model and the new one.

And there is no evidence they are more than a one-trick pony. Heck, it took Google almost a decade to figure out a 2nd business model (Android) that they are just now using to their benefit.

Sure, Groupon has done some good things, but my hunch is that all they've really done is awoken SMBs to what is possible.

There are too many uninteresting deals from acupuncturists and massage therapists now due to competition, weaknesses in the business model, etc.

Chris

[Adam Rachwal]

Everyone keeps propagating the $6billion Google offer which in my opinion was not different from the following: "Times Square Screen Hack - looked amazingly real to me when I saw it the moment it came on twitter only to find out the next day that it was a viral marketing campaign to promote a movie" This Google offer was in my opinion a great way to go viral for Groupon without any essence. I don't disagree that Groupon came up with a great idea of making it simple for small local businesses to advertise online to a mass local market - ONCE. I published a free local newspaper for over two years with local business advertising supporting it, I know a tiny bit about this business. For Groupon that ONCE is enough because the huge number of local markets in North America with a huge number of small local businesses is just that - HUGE. Therefore, even getting them to advertise once is plenty of cash - instant cash, the best cash flow you want especially when you want to attract Wall Street attention.

[Matt Hulett]

@Tom Clarke - I disagree. I would be interested in looking at more data. This article(http://blogs.pitch.com/fatcity/2010/10/do_restaurants_get_a_good_deal.php) sites a study that shows
66 percent of the businesses surveyed; however more than 40 percent indicated that they would not run such a promotion again. Clearly, it is going to depend on the category (spa's v. restaurants). Another factor is redemption rate. This article
plots redemption rate over time. Post on that is here: http://blog.yipit.com/2010/08/19/slides-the-explosion-of-group-buying/ . Clearly, the merchant wins by category for the revenue upside of breakage. Its not like merchants will build businesses on breakage. I continue to believe that you can't look at daily deals as being an unsuccessful science project. Just like my travel example, we found periods of time where hoteliers needed heads in beds and they were willing to pay 4x the normal commission rates to get those travelers.

[Tom Clarke]

Wrong - The model is faulty - The bottom line: the local merchant CANNOT sustain a 75% discount - Spas, yoga, skydiving and other can but how many customers are going to buy over and over the same type of coupon?

[Rob Solomon]

Leave it to Matt Hulett to offer a very insightful understanding of the potential opportunity. Matt gets it and is one of the best minds in startupdom.