The Groupon Phenomenon

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December 13, 2010 5:41 a.m.

James Surowiecki has an interesting piece up at The New Yorker on Google’s play for Groupon.

Two points I would add:

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.

The second point I’d make is that Groupon’s client base isn’t like other social media. In assessing Groupon’s value I think Surowiecki makes a mistake when he compares Groupon to Facebook, noting that Facebook has fewer employees than Groupon yet has 500 million users compared to Groupon’s 40 million subscribers. Important point: Facebook’s customers are its advertisers, not its users. The instant truism about Internet commerce holds here: “If you’re not paying for something, you’re not the customer; you’re the product being sold.”

Groupon has two customer bases: the consumers who buy the coupons and the businesses that offer deals through Groupon. Both are paying Groupon money either directly or indirectly. That puts Groupon in a different category than the social media giants it’s sometimes compared to.

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