Tuesday, December 14, 2010

The Ups and Downs of Groupon

Google was apparently ready to shell out between $5 and $6 billion for local coupon discounter Groupon. After weeks of negotiations, Groupon walked away  Groupon walks away from Google takeover talks. Why is Groupon so valuable? See below. 


But first, if you're not familiar with them (Groupon, not Google) they sell coupons at a discount - get $50 worth of product from a local retailer, restaurant, masseuse etc. for $25. Sounds like a pretty good deal, and is if you cash it in. Not such a great deal if it languishes in your coupon drawer and never gets used. 

It can be a good deal for the businesses, too - especially those coupons that never get used. 

A post at Talking Points Memo discusses the positives for the business using Groupon:

First, Groupon is not merely a way for local advertisers to attract new customers. The way Groupon works means it essentially serves as a form of short-term financing for small businesses. Once your deal on Groupon ends, Groupon sends you a check within a couple of weeks for your share of the sales of your deal (Groupon's cut is half, Surowiecki notes). Not only do you get that cash up front, but all you've actually sold is a coupon (think of it more like a gift certificate), so you get the benefit of the spread between the number of coupons sold and the number actually redeemed.
A businessman in DC whom I redeemed a Groupon with confided to me that his redemption rate was well below 50 percent. As he put it, any new customers you get is actually icing on top of the cake of short-term cash flow. That makes Groupon a lot more attractive to small businesses than traditional advertising vehicles.

Here's the TPM post: The Groupon Phenomenon and here's the referenced post from the The New Yorker, Groupon Clipping

Back in September Bistrolink discussed what can happen when all of the coupons are redeemed - and lots of them to boot!
...As you can see, 1565 of them were purchased. If the split was 50%, that means Groupon and The Foundry each made roughly $27,000 up front. This is probably nice for both parties, and many of these deals sell 2000-4000 units. One of the difficulties for the restaurant, though, is that they now must honor the Groupons that can be worth over $100,000. Even if their cost of goods and services is only 50% of the value, they are paying back a loan of $27K with $55K...

Google's Interest in Groupon

Groupon is a profitable company, but why was Google willing to pay about $6 BILLION dollars for it? The answer seems to be local advertising - that's where the advertising companies like Google, Facebook and their competitors expect much their revenue growth to occur in the not so far off future. 

As a business owner you'll have to figure out the best way for your business to take advantage of these advances in targeted, local advertising. But be careful not to sell too much at too large a discount despite the short term cash influx. 

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