Groupon Takes Over the World

It seems that we are now well in the middle of the Third Great Wave of Internet development, with companies expanding on the Internet world that was created before them and tying it in to the “real” world: social applications (esp. games), location awareness, and real world commerce.

In other words, Zynga, Foursquare, and Groupon, the companies that currently look to be the ones on the verge of mass adoption and the ones that are defining the parameters of how the Internet will be evolving.

 From my little VC bubble it feels that of the three, Groupon lately has been defining more than anything else. We here often operate according to Auric Goldfinger’s dictum that, “Once is happenstance, twice is a coincidence, three times is enemy action.” Except replace “a trend” for “enemy action.”

And with these rules in mind it seems like half the startups that I’ve seen in the last couple of weeks have displayed some kind of social group buying component in their model.

Which makes sense if you look at Groupon’s phenomenal growth. The service has grown more than 1000% in the last year, has expanded into more than 200 markets in about 30 countries, and is reportedly doing $50M in revenues each month with a 50% margin. This is pretty much the closest thing I’ve seen to a startup whose model is actually printing money.

Two interesting thing to mention here: As big as Groupon is getting and as fast as it’s growing, it has barely managed to scratch the demand of businesses to utilize the service. And all this for a company that has almost zero real technology in a field where the barrier to entry doesn’t exist.

For example, in our teeny tiny little local market alone I know of at least 6 separate Groupon clones, which is pretty remarkable.

 Groupon is aware of this and is looking to expand its model with a self service solution that they are currently piloting. The idea here is to eventually let any business that wants to participate in the party, basically to turn the model into a distributed rather than a centralized one. This will help overcome the main limitation of the Groupon model, which is scale and the high cost of direct sales to get new businesses on board.

While this is a logical development from Groupon’s point of view, expanding and distributing the social group buying model opens up a number of interesting problems:

• Fraud and security issues – From the end-user perspective: once the process of recruiting new businesses leaves the control of Groupon’s sales staff, who monitors that the deals are legit and will actually be honored? From the retailer perspective – how do we control the problem of fake coupons?

• Types of businesses – Currently, Groupon and its clones appear to focus on specific types of businesses, mainly restaurants and spas. Some smaller retailers (in particular those with unique or artisanal products) have gotten into the act as well, but at the moment it is seems less useful for larger retailers, not to mention national ones who often run their promotions top-down. Nor has anyone figured out how to utilize this tool effectively for e-commerce sites and local service providers.

• Transitioning social shopping from a marketing tool to a CRM tool – This is tied into the previous post. Currently the classic use case for a Groupon solution is with a local business which is willing to take a loss on the coupon in order to bring people into their establishment physically in the hopes that a certain percentage convert into regular customers. This means that the Groupon solution is more geared to getting new customers than to retaining existing ones (since you can’t keep offering loss-leader deals to regulars). What other tools will a Groupon solution be able to offer a business to build and maintain relationships in the long run?

I predict that in the next year we will see a lot of activity around not only these issues but a host of other things that will be built on top of the Groupon platform. This will include everything from secondary coupon markets to systems that will allow for increased targeting and matching coupons to users.

 

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