Betting Against Groupon and LivingSocial

I’m betting against Groupon, LivingSocial, and the other social commerce startups. Sounds crazy, right? I know they’re the hottest thing around right now, but I think their 15 minutes of fame are just about over.

Why? Like OpenTable, the economics of Groupon don’t often work for local business owners. Google it and you can find a ton of stories about how businesses got overwhelmed, lost money, etc. More importantly, Groupon’s value proposition for business and consumers isn’t unique, and relies on expensive local sales forces and their massive email lists to achieve local reach.

That doesn’t mean it’s not a smart business, but it does mean that the costs to run it as a standalone one are much higher than to run it as a department of a newspaper, which already has the reach, salesforce, and relationships to make local/regional group buying and social commerce work.

Philly.com is doing a nice job of this with DealYo, but I wonder if it’s actively taking business away from the startups. I suspect a larger media company like Philly.com could make deals with current advertisers and cut their margins to the point where they could run Groupon out of town if they wanted to.

First, businesses want to get the most customers and offer the least amount of discount. The classic 50% off of Groupon isn’t ingrained in consumer behavior yet, and I think a local company could convince advertisers to come on board at 35%. Second, Groupon reportedly takes half of whatever revenue it sells; a local media company with an existing sales infrastructure could probably get away with less than that.

PS – The big boys are paying attention. Gannett is hiring a ton of people for a new “Social Commerce” department. Every medium-large newspaper in the country should be looking to innovate around them.

8 thoughts on “Betting Against Groupon and LivingSocial

  1. Harvard Business Review just did a story on this very topic (I’m obsesssed because, as you know, I called for the demise of Groupon after they walked away from SIX BILLION DOLLARS). They said there are three things economists agree on: 1) Groupon was stupid to walk away from $6B; 2) Google was stupid to offer it; and 3) Groupon is about to meet its demise because there are 400 (!!) competitors.

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    1. I agree completely. And 400 competitors is a lot, but they will fade out, mostly because they won’t be able to maintain the technology upkeep and the expensive sales forces. Those costs are big for independent companies, but smaller/marginal for pre-existing firms. That’s not to say it’s cheap to run Groupon out of a news company, but it’s definitely cheaper.

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  2. It wasn’t the article I was looking for (there’s a much better one out there), but it’s what I could find at the moment. 🙂

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  3. I have been thinking that Groupon was going to start to lose market share for a while now. I think all of the points you list are accurate, but one larger thing is that people might love deals, but most people really only want deals on stuff that they like. And, lately, a lot of the deals that I see Groupon offering, can’t be things that enough people want to buy that it makes for a long term successful business strategy.

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    1. So the question becomes whether you can offer enough deals per market for it to be personal, yet retain a critical mass of consumers. And all the while, remember that the merchants are your real customers, and they’re often pissed and feel like they’re getting a raw deal.

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