Groupon, the crowd-funded daily deals site, and the fastest growing company in the world, ever, IPOs this Friday at a supposed valuation upwards of $10 billion.
That’s a huge number – I mean, you can buy a whole lot of pole dancing sessions with $10 billion.
It’s also nearly twice the valuation (at the conservative 10B estimate) that Google bid for Groupon earlier this year, which probably included an acquisition premium. In turn, the Groupon IPO has a lot of critics, such as Henry Blodget of Business Insider.
The argument is that Groupon’s recent changes in accounting practices, the somewhat unexpected reduction in marketing expenses, combined with the increasingly competitive landscape comprised of main competitor Living Social and up-and-comer potential behemoths Google Offers and Amazon Local, doesn’t add up to $10 billion.
But Wait, There’s More
Studies have shown the switching cost from one daily deals site to the next is very low, so throwing Google or Amazon into the mix seems like a pretty ominous thing for Groupon. There is also no shortage of reports such as this June TechCrunch article, “Groupon Was ‘The Single Worst Decision I Have Ever Made As A Business Owner’.” Other studies have shown that group buying does not lend itself to loyalty or repeat purchases. In other words, many businesses have struggled to turn a profit from their Groupon affairs, and, just because you used a voucher to buy from your local deli this week doesn’t mean you won’t buy from the deli down the street next week. Lastly, Groupon’s international success doesn’t appear to be so successful, according to this TechCrunch article.
So, even despite only releasing about 5% of float with this IPO, how can Groupon really maintain a $10 billion valuation? Well, I’ll tell you how.
In tonight’s Digital Media Marketing class at Stern, our guest lecturer was Groupon’s SVP of National Sales, Lee Brown, and he told us what’s what. Unfortunately, he asked that we not share the secret stuff*, but what I can write is still pretty interesting.
New Features
Brown highlighted two relatively new Groupon features: Groupon Now and Groupon Rewards. Now is a location-based real-time deals platform, accessible via mobile app. It’s a different sort of revenue model in that it will attract a different type of consumer or mindset. Rewards is a platform for attracting repeat customers and incentivizing customer loyalty – it works via opting-in for sharing credit card transactions, which could be a ball of worms with regards to privacy, but it addresses one of the big Groupon complaints, that there’s no loyalty to stick with the program. It’s been noted that Now hasn’t been terribly successful thus far; however, the possibilities of personalized and user-curated deals could be huge, and having a stable platform ready and waiting seems like a good thing.
Brown also discussed the firm’s yield management analytics, a whole suite of stuff to help companies understand how to make best use of the platform – Groupon recognizes that their model is new, and it wasn’t going to be perfect from the get-go. As the company continues to experiment, it will share the benefits of those experiments with its customers and help optimize Groupon deals and deployments. Also, according to Yipit, Groupon has twice the market share of Living Social.
In Conclusion
So, in summary, there are skeptics and there are possible pitfalls, but all in all, I think Groupon has some solid potential. Stories of the company culture remind me of an earlier Google, so one could expect that encouraging the sparks of innovation follows suit. Maybe the IPO is over-valued, but Groupon is doing new and interesting stuff, and is well-positioned for significant growth at least in the near future. As this Dealbook article notes, there are a lot of similarities between Groupon now and Amazon a decade ago, so only time will tell if the parallels continue as Groupon grows post-IPO.
*Note: no actual secrets were divulged, Groupon is after all in its IPO quiet period…
