Wednesday, January 5, 2011

My Take on the Groupon Frenzy

Just over a year ago I blogged about the breathtaking amount of deal activity in the local media sector and mentioned a new company called Groupon that had just raised $30 million. (A significant amount of money by most fund raising standards, although somewhat inconsequential compared to their latest raise and Facebook's eye popping $500 million Goldman Sachs investment at a $50 billion valuation.)

What was driving all the interest then and even more now, is the sheer size of the local ad market (over $100 billion per year) and how little local businesses spend on digital media (less than 10% of their ad budgets.)

But it is, and always has been, the toughest of markets to crack and achieve any degree of national scale.  Soliciting and servicing millions of highly demanding, not particularly tech-savvy businesses who have limited resources and a laser-like focus on results is a monumental task.  AOL, at the height of it's popularity, couldn't crack it and Google, at the height of it's power, has only had limited success.

From that post ...
    "... local advertising is a tough business. As a well-known local media consultant said, "local is sold not bought." Three things are needed for a company to succeed in local: a great product, significant capital to drive awareness and, most importantly, a big local sales force. The Yellow Pages became a $20 billion category, dominating local advertising for years, based in large part on a famously aggressive local sales force numbering in the thousands. "
Groupon not only has the three ingredients (their sales force is already among the largest in media history), but appears to be turning the "sold not bought" assumption on it's head (businesses are calling them and can't sign up quick enough).

And that is why Groupon may be worth every penny of it's latest estimated $7 billion valuation.  Creating enormous new marketplaces that bring businesses and customers together, exciting both parties along the way, is what made eBay and Google such extraordinary businesses.  And, as Google has also proven, new forms of advertising that cut through the clutter and provide businesses with clearer metrics of accountability will be readily embraced. Finally, with a rumoured $2 billion revenue run rate, Groupon may be outpacing Facebook, which is now seriously encumbered with a ridiculous market valuation and quite frankly, does not have as clear a scalable revenue model as Groupon.

A blog called Measuring Measures summed it up well:

    "Advertising has become quite spammy and irrelevant. We've gotten away from the core issue, which is not inherently spammy at all - merchants interacting with people to retain their existing customers and win new customers. There is nothing evil about that, and the direction that advertising has taken for decades has been largely disrespectful, manipulative, misleading, and lacking in creativity. As a result, it has become quite boring.
Groupon shines a light on a new direction with a different vibe. It is more fun, more down to earth, and a far more compelling proposition for the customer."
There are still many questions about how big Groupon can become.  They just haven't been around long enough to accurately gauge repeat buyer and seller trends. Two key questions that will indicate their future significance: What is the real, long term impact a Groupon deal has on a business's bottom line and, are folks actually redeeming all those deals they purchased in the spur of the moment?

I have been a subscriber via email for 3 months now and still haven't purchased a deal (a fair amount have been relevant and I was close a couple of times), but a week doesn't go by when I am not forwarded one from a friend via email or on Facebook.  (Another "social shopping" company, Living Social, which I just signed on to, seems to be even more popular among my friends but isn't getting the same level of media attention, yet.)

And my friends who own local businesses can't stop talking about both companies.  One friend in particular, who owns one of the largest and most successful dance schools in the country said, "It's advertising that sends you a check." But she is an early adopter and tech-savvy entrepreneur who started building a fan base on Facebook years ago.

Seems the real value in Groupon will be unlocked when they move beyond the curated deal a day model and introduce a self service platform that enables local businesses to communicate more consistently with a more finely targeted audience.

Stay tuned.  Will be fascinating to see how it unfolds.