The Groupon Effect
Lately I’ve been wondering about what the long-term ramifications of “The Groupon Effect” will be. I know that Google valued the company around $6B in Nov 2010, that their run rate is $2B/yr, and that many believe it will IPO this year around $15-20B and likely rise thereafter. There’s no question Groupon is a phenomenal business and investment opportunity. What I wonder about, though, is: Will Groupon be around a decade from now, or will it have eaten its own customers?
My view of Groupon is it helps merchants (1) get rid of inventory, (2) get more foot traffic to increase chances for higher ticket sales, and (3) compete against each other for goods and services that are improperly (i.e. inflated) priced, like spa treatments, wine, and skydiving 🙂
Groupon “Stores” is the next iteration, with the goal of helping merchants acquire new customers. But who controls the customer?
I know the company and investors will do well here, and it is an unbelievable success story. Amazing, in fact. I may be completely crazy in saying this, however: I am not sure it will last.
I believe merchants will be forced to better manage inventory. Merchants will have to use services like Groupon to hook them offline, for fear of losing them on a whim. And, merchants will need to price items in a way that is more in line with reality.
The bigger Groupon gets, the more pressure it will place on its own source of margins – the merchants.
Finally, on a personal level, I wonder if “The Groupon Effect” will withstand local, social bonds. Part of the dilemma here is that there are too many retail operations, and in a way, Groupon helps root them out. It’s good for the economy. On the other hand, part of many peoples’ own lifestyle dreams is to own their own business, and to cultivate a loyal following with their best customers, many of whom would be considered local. Could the effect douse those embers? I hope not.
(Thanks to friends Shyam, Tristan, and Jeff Liu who helped me think this through.)