How Google Will (or could) Destroy Groupon In Less Than A Year

How Google Will (or could) Destroy Groupon In Less Than A Year

12/14/10

Mostly everyone seems shocked by Groupon deciding pass on Google’s $6 Billion offer. It’s rumored that they’ve been able to ramp sales up for a revenue rate of $2 billion dollars a year. Now there are a few things to keep in mind. For one, the total revenue figure is the amount of money that passes through Groupon. The amount they actually get to keep is going to be closer to $900 million. If they have a net profit of $300 million I would be very surprised. They’ve been adding daily to their huge sales force along with lots of customer service reps. Headcount is now somewhere around 2,500 people which seems unreal. All of this basically means that they have giant overhead and on top of that they’ve been making acquisitions of competitors in foreign countries and domestically as well. The point is, while they’re making money like crazy they’re spending just as quickly.  A major problem that Groupon faces (other than an ever growing legion of competitors with essentially the same business model) is that their hyper growth and all of the PR and hoopla surrounding their success has allowed them to ignore one very simple fact.

A lot of businesses aren’t going to want to continue to do business with Groupon once they begin to see exactly who they end up retaining as customers who participated in a Groupon deal.  Most businesses can’t afford to sell their products or services at 50% off. It’s an unsustainable business model. Selling something at fire sale prices once or twice a month to attract a lot of new customers is great if you’re looking for new customers who won’t buy anything for a regular price. If however you hope that you’re going to gain a lot of new customers who are then going to be cool with paying $100 instead of $50 from now on for that floral arrangement, well your SOL. What’s really alarming is that no one seems to point out that 8 out of 10 businesses fail and struggle to get businesses in the door immediately. Groupon is now making their way to those new businesses and many owners feel like its initially a success. To go from no business to a wave of business in a short period of time must seem like a prayer of relief. Until no one comes back, or the ones that do are asking for the “Groupon Rate”… I’m sure this isn’t always the case but I just don’t know of many businesses that can continuously sell @ 50% off.

Groupon now has a new offering where they will (for only a 10% fee) help you offer your services at unsustainably low rates online via their local deal feed and through your very own Groupon Store. So in other words; “We help you lose money, and we only charge a 10% processing fee!”. At what point does the math catch up with all of this? What’s ironic is that Groupon isn’t helping businesses connect with suppliers who are selling things at 50% off.

If you’re using other forms of advertising to gain new customers at least your not attracting customers who are always looking for a deal. So if you spend $10,000 to gain 20 new customers via PPC ads and that same $10,000 spend (with Groupon) gets you 100 new customers in the door at 50% off and you only retain 20 of them well you’ve just paid 100% more for those 20 clients and they’re not necessarily the ones you really want. Okay so all of the “boring economics” aside there are probably some examples where Groupon could work well year round.

Okay so now I know the title of this entry is more interesting than discussing the sustainability of the Groupon business model. So I guess it’s time to get to that….

This might seem to be kind of a stretch but I think Google might have been planning (or hoping they would) on getting turned down. Now it kind of gives them the green light to go after them in the most efficient manner. In order to destroy Groupon, Google only needs to cut them off at the search.

There’s a ton of consumers who aren’t even aware of Groupon yet. They’re still looking for deals on products and services the old (old / new) fashion way, by searching for it. So what is standing in Google’s way of offering up businesses a way to offer up daily or weekly deals on their wares at some incredible discount. It might look something like this. (Please pardon the crude Google Deals Coupon, but I’m no graphic artist)

Google VS Groupon

Now I know what you might be thinking, how could Google go and do that? Simple, by contacting everyone who lists their local business with Google local for free and offering them the ability to offer a daily deal and create a coupon with the exact same system they use for creating an Adwords ad. Wait better yet, why not offer them a $500 incentive. Use some of that $6 Billion they just saved to offer them $500 of free Adwords ads if they set up an account and offer a daily deal. Better yet, Google can even offer to give them a free local phone number they can use to track all of the calls that come in. So now you won’t have to worry about making sure your employees ask how they heard about your company or service. Google’s got a record of all of it. Google could even create a check out process where you pay for your coupon (Deal) and set your appointment (when applicable) at the same time. But imagine if Google just used $3 billion of the $6 billion they offered Groupon to launch this new initiative. $2.5 billion to acquire 5 million new local businesses and $500 million for the development and launch….

Another (crude) example of how it could work is below.

Now you might be thinking that offering this kind of service is kind of anti-competitive. Well they’re already doing exactly this same practice in other verticals. Just take a look at the home mortgage industry. Search for “mortgage” or any number of related terms and in the first spot you’ll see one of Google’s very own comparison ads.

And finally I think that this daily deal thing is something that Google has been thinking about pretty early on….. (Maybe since 2004)

Google Deals

Groupon has executed well and built a great sales force which Google could use sell a lot of their different services. That could be a significant reason they were willing to pay so much for it, or the exact opposite. Knowing they might not even need that giant sales force they could cut headcount by 2,000 and enjoy even higher margins. That’s one reason why I could have seen Groupon not selling, if part of the deal was contingent on Google making assurances that they wouldn’t cut headcount with regard to the sales reps.

Regardless, Google just needs to chip away at the daily deal revenue that Groupon is generating by offering quite frankly an even better service. One that doesn’t rely on a business being willing to sell their product or service at a loss only to get people in the door.

Only time will tell if Groupon will continue to thrive, but my money says that a year from they’ll be another “Friendster”…

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