Doing it with GroupOn

December 27th, 2010 § 0 comments

There is a big discussion going on about GroupOn‘s business model. After the company refused Google’s acquisition offer, nobody could decide whether the company owners were just too crazy or too brilliant, confident in their business ability to outperform any kind of offer Google could come up with–and that after Google virtually double its initial offer.

John Battelle is one of the ones who think that GroupOn made the right choice. He writes:

Good sources have told me that GroupOn is growing at 50 percent a month, with a revenue run rate of nearly $2 billion a year (based on last month’s revenues). By next month, that run rate may well hit $2.7 billion. The month after that, should the growth continue, the run rate would clear $4 billion.

Battelle attributes this to a combination of factors (relationships, location, and timing–see the article for a more in-depth explanation) that make GroupOn’s appeal to small business pretty much irresistible. As he notes in his article, that run rate is the triple of what Google itself experienced in its early years.

I was talking to a friend a while back about social buying and he said the major problem that will affect and eventually kill GroupOn’s–and all of it other clones, by extension–is churn, that is, the fact the a lot of the offers were creating problems for the businesses using the platform. In fact, there have been a lot of reports about people being mistreated if they came bearing a GroupOn or equivalent coupon, and I have heard some of those stories first-hand. In many of those cases, the business owners had miscalculated what they could or should offer and were unhappy with the entire experience, consequently becoming less and less interested in working again with GroupOn or their local clone.

But I believe that the churn we are seeing right now is just a consequence of the way new markets behave. If Battelle is right–and I believe he is–the rate of churn will fall with time as business begin to find their sweet spots in the social buying ecosystem. I don’t see why, for example, GroupOn can’t offer a tool that will allow business to input some parameters and find the ideal price for a given offer. Granted, that will never be exactly precise but will give most business owners using the platform a way to avoid the most extreme problems.

But, ultimately, I believe that GroupOn will succeed because it’s changing the way people are relating to those business using social buying to attract them. Recently, talking to two other friends, they told me how our local clones had impacted their buying patterns.

One of them, a 40-ish divorced guy, said he wouldn’t dine out anymore unless he had a coupon and that the coupons were helping him to raise the bar with regards the kind of places he was able to go to in a single month. Previously, going to a more expensive place meant he was able to do that just a couple times each month. With the help of coupons, he was going to more expensive places one or more times each week. That’s a huge change in spending patterns and one that’s benefitting him and the restaurants he likes.

But other guy, a 30-year-old or so guy, said social buying was actually helping him to get laid. You see, this is a single guy who is using a variety of coupons–for restaurants, spas, clothing, small items–to impress and convince women to have sex with him. He is still using a considerable amount of money, but GroupOn and the likes are helping him to spend that money in a more efficient way towards his objects–which, right now, are pretty much limited to getting laid as many times as possible with as many women as possible. And it’s pretty evident from the way the market works that any business that helps people to get laid–or find any measure of sexual satisfaction for the matter–is in much better condition to thrive.

So there you have it: people are getting laid using GroupOn. That makes GroupOn business position a much stronger one. Battelle is right, from the small business’ point of view–but my friend is also right, from the consumer’s point of view.

Either way, GroupOn wins.

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