Groupon's $6 Billion Secret: Follow Facebook

Ever since Groupon pointed a very serious suitor – Google – off its front porch, many industry watchers have wondered how the two-year-old start-up earned the $6 billion offer in the first place. And they’ve asked whether the daily deals company can sustain its incredible growth rate. It has picked up at least 15 million U.S. e-mail subscribers via mainly online advertising and now totals 50 million worldwide, thanks to various acquisitions.

ClickZ reached out to numerous veterans of local promotions, daily deals, and online coupons – categories Groupon is generally presumed to occupy – for comment on the company’s noisy entrance and its value proposition.

Matt Wise is CEO of ePrize and previously held the same post at Q Interactive, parent company of 15-year-old digital coupons pioneer CoolSavings. While deals platforms like Woot, Jellyfish, and the U.K.’s iBood have been around for years, Wise explained, their arrival in the marketplace was relatively ill-timed. Put another way, they didn’t launch at the height of Facebook’s revolutionary social media impact on the broader culture.

“The advent of social networking created an environment in which the ability to share a discount became vastly easier,” Wise said. “And the Facebook phenomenon to a large degree really enabled that. What if Groupon came up two years earlier? You know, the marketplace just wasn’t as ready or as accepting then of shared and group efforts… The model, quite frankly, is not that different from many of the buying platforms that were out there.”

Wise characterized Groupon as “tangential competition;” his agency helps brands with interactive promotions. Still, he spoke candidly of Groupon’s ascent, saying its rapid growth was “absolutely surprising” to players in the discount/savings niche.

“We are all a bit envious of the success, I think,” he said. “They just landed on that perfect mix of how we interact with the consumer and the consumer being ready for this medium. They just got there at the right time, and that’s great for them.”

Matt Wisk, president of 10-year-old online loyalty company MyPoints, said Groupon should be commended. “What Groupon has done that’s healthy for the whole deals space in general is opened the online component to a local market,” he said. When asked about the nature of its business model, Wisk replied, “What they’ve done is take a very familiar e-mail communications channel and made it a social graph multiplier.”

Groupon’s Growth Will Likely Continue

How much more can Groupon grow? The question is on everyone’s lips at the moment.

The Chicago-based firm just yesterday completed a $950 million round of funding and has already ramped up acquisitions of international group-buying players. Today, it revealed it has purchased SoSasta (India), Groupoer (Israel), and Twango (South America) and will rebrand them Groupon India, Groupon Israel, and Groupon South Africa, respectively. And, AdAge.com reported on Monday that the daily deals marketer had purchased pre-game ad slots for the Super Bowl and would have bought an in-game spot if they hadn’t already sold out.

While LivingSocial is largely recognized as Groupon’s chief competition, the ever-growing number of companies in this sector raises the issue of saturation. Townhog, kgbdeals, WhitePages-owned DealPop, Bloomspot, StuffBuff, Dealster, SocialBuy, and HomeRun offer similar platforms. And the low barrier to entry means more players will probably emerge. Facebook has a still-nascent deals platform, and geo-social brands such as Foursquare and Scvngr are likely candidates.

Bryant Shea, VP of innovation at digital agency Isobar, predicts those competitors will eventually consolidate. “People don’t want five different check-in services,” he said. “And they don’t want five coupon services.”

Wise from ePrize said market saturation will not become an issue for Groupon in the near future. “People have said that it’s a fad… But if you take a larger step back and look at the success of couponing in America, there’s without a doubt an enormous appetite in the American psyche to get a discount and to get a deal. It’s a multi-billion-dollar industry.”

Mike Hess is a marketing research executive for ad agency Carat USA and held a similar role with Knowledge Networks/PDI, which has utilized a coupon testing model for brands since 1984. He cites PDI research that found 25 percent of consumers like to use coupons when they shop. Since there are 114 million households in the U.S., PDI’s numbers suggest Groupon could almost double American subscribers alone to 28.5 million.

“There really is a [coupon] segment of people out there,” he said. “We found that half of that 25 percent wanted to use coupons so they could buy brands they otherwise could not afford. They wanted to buy good brands, and the coupon made up the spending gap. And the other half wanted to use coupons to feel good. When they get the receipt, they want to look at that line that says they saved ‘X’ dollars.”

Groupon and its competitors specialize in deep savings of 40 to 70 percent, and they play up such savings in their offer copy. Indeed, they attempt to leverage each psychological motivation to use coupons mentioned by Hess.

Debate About Groupon’s Business Model Continues

But even if consumers continue to embrace Groupon, questions persist about the value proposition to marketers. For instance, Rice University research last fall found that the group-buying platform was unprofitable for one-third of the businesses that tried it.

According to Groupon, participating merchants retrieve 50 to 70 percent of the face value of their deals. And it contends that even if the customer never comes back after the campaign, the retailer has a reasonable shot at breaking even or turning a profit as customers typically spend 50 to 60 percent more than the deal’s value. Out of 3,000 merchant clients polled by Groupon in 2010, 95 percent stated they wanted to work with the group-buying platform again or would recommend it to another business.

At the same time, Roni Madden, a regional sales director for restaurants e-mail service provider Fishbowl Marketing, said the platform was extremely risky for clients in her niche.

“From the restaurant point of view, the consumers who use Groupons – that’s all they ever use,” she said. “I know the idea is to get customers to fall in love with you so they do come back. But it doesn’t always work that way. For restaurants, it especially doesn’t work that way.”

Groupon does appear poised to try to make its offers more hyper-local, perhaps by zip code or neighborhood instead of merely city-by-city. Madden said such a development would improve the plight of restaurants, which would like to see campaigns engender more customer loyalty rather than attracting serial discount scavengers.

“Hyper-local will not erase the problem, but it will lessen it,” she said. “It would make it better under some circumstances, absolutely.”

On a business level, Ken Treske, chief operating and marketing officer for Dotomi, said the key to Groupon’s future viability is scale. He said that if the company can go from 15 million U.S. subscribers to 30 million, it would be tough to compete with domestically for companies like LivingSocial or Townhog.

“The [digital] coupon is an incredible hook to building an audience, which you end up knowing a lot about due to purchase behavior,” Treske said. “I do have questions about the sustainability of their model, offering 50 percent discounts where Groupon takes half and then the local business takes the other half. Will clients get tired of that? I don’t know. But if they do continue to grow rapidly, I think they’ll go from being a coupon company to a CRM provider, for lack of a better term. And everything is driven by eyeballs. They are racing to get big. And if they can get big enough, they will have a sustainable business model.”

And again, if Groupon continues its meteoric rise, it probably owes the likes of Facebook, MySpace, Friendster, and other social media pioneers a huge debt of gratitude. “Consumers are vastly more willing to do something like this than they were just five years ago,” Wise of ePrize said.