Like, a Billion Dollars: Groupon Is Discounts, Not So Social?

I want to say that upfront that this blog post is in no way a knock on Groupon, or even a questioning of the firm’s valuation.

I think Groupon is a genius execution. At some point, someone was going to try to roll up local discount networks and, from this insightful post from Greylock partners Reid Hoffman and James Slavet, it seems that Groupon is building an infrastructure that will allow for greater personalization and better relationships with merchants and consumers. With this intelligence in place, maybe Groupon is best suited to be the roll up king of local deals.

However, there are definitely risks:

I’m not entirely sure that Groupon has economies of scale, as referenced in the Greylock post. I’ll agree that they are, by far, the biggest player in the local deals market right now, but in order for any company to have economies of scale, it needs to leverage that scale in a way that will decrease its costs. With the low capex required to run their business, I’m not confident that the Groupon model will enjoy much in the way of scale economies. Sure, they have a huge email list, but that’s a potentially flimsy asset in the world of Facebook, which drives deeper relationships through networks (other examples are LinkedIn and Twitter).

I’m also not convinced that Groupon is a social service. It’s true, a critical mass of users has to say yes to the deal in order to tip it, but that’s not exactly social, by recent definitions of the word. The people tipping the deal don’t need to be related in any way (other than being in the same zip code), so I’m still a little confused by the “Group” concept. The risk that this poses for the company is that it isn’t really building any network effects because it’s not really building a network, it’s building a subscriber list. Users will pour in and register, but will go away if the deals don’t stay. They will go somewhere else.

I believe competitors will come into this space and charge less than 50% (FWIU, 50% is what Groupon charges a local business, after the discount), and it will be a big, big player like Google that can lose money for a while. So revenues will drop because you can’t roll up local deal sites forever, and eventually marginal cost will be the going rate, and consumers will follow the best deal because deal-seekers are platform agnostic. They don’t believe in Beatles, they just believe in deals.

UPDATE: Apparently, the phenomenon of  runaway users can happen really quickly


  1. I’m just waiting for a relevant offer from them. The only time I made a purchase with them was the Fresh Direct deal which was a debacle. After the fact people found out that the deal was only for new memberships. 😦 Bad move.

    1. Agreed that was an issue. There’s something to be said for being able to move that many people in one direction and make them al drop their credit cards.

      Technically, they can solve the operational issues. I just think that in the long term, people won’t really differentiate one discount broker from another. It’s not like there’s a technology platform that’s being leveraged…

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