The rumored $6 billion offer Google dangled in front of Groupon grabbed headlines as observers wondered why the search giant would pay such a premium. The proposed acquisition also raised questions about the vigor returning to Silicon Valley’s start-up culture, where an enormous number of “Groupon clones” have hatched in recent months.
Apart from margins that border on the ridiculous, driving people to local stores is what really attracted Google to Groupon. Consumers may buy Groupons online but they redeem them in brick-and-mortar establishments.
Groupon creates traffic for retailers and fills seats at restaurants. The average sales price for a Groupon is around $40, with the consumer getting $80 worth of merchandise, food or services for that price. Of that $40, 47% goes to Groupon (nearly $20) while the merchant is responsible for delivering $80 worth of product for $20. (Groupon pays about $3 to market that deal; you can decide if it is a good one for merchants.)
Groupon is the first major win for this “offline” model. Even as Web retail continues to mature, 94% of all retail commerce still occurs offline. Groupon’s success is built on the tenet that it brings people through the doors.
But what value does a clone bring to the marketplace? It’s just a copy, after all. In fact, Groupon still owns over 80% of the deal market despite hundreds of similar sites doing the same thing.
We know about these trends at Signpost. In New York, where we're headquartered, retailers tell us they are called five or six times a day by Groupon-like daily deal companies. Marketing to consumers has also become more expensive. LivingSocial, in a continued bid to unseat Groupon, announced 50% revenue sharing (vs. 10% at Groupon) for affiliates who drive traffic to their site.
We have a different thesis on the future of online-to-offline marketing. We believe it’s a deal marketplace where users are encouraged to post the great finds they discover in their neighborhoods while merchants are encouraged to experiment with offers that work on their terms.
On Signpost, merchants can set limits to the number of deals they offer and, more importantly, determine when deals are available. If Tuesdays and Sundays are slow for your restaurant, a Signpost deal might be a good way to bring in new customers to minimize that excess capacity.
The additional utility encourages businesses without a need for thousands of customers to offer better-than-average deals to a limited audience.
Further, we've witnessed first hand how members of the Signpost community have become net promoters for merchants. Our members are socially connected, savvy shoppers that love to discover and share deals with their friends. When Signposters see a particularly enticing special, they post it on Signpost. As more foot traffic enters the store, the merchant is rewarded for offering a good deal.
In New York, one of our four key markets, more than 350 deals are posted each week. These deals come from both the community and merchants. The merchants are not limited to a single deal offered on a particular day via email blast. Rather, they control the frequency of the distribution and the times when a given deal is offered. This not only allows us to grow our audience of users, it also caught the eye of Google (we, unlike Groupon, already have the Google name on our website; full disclosure: Google Ventures is an investor in our site along with Spark Capital).
We think there is a huge value in local, but we believe that the future of the industry lies in helping the entire marketplace benefit, not just the company that markets the group discount. Are you offering a product that Groupon doesn’t address, one that is attractive to merchants as well as consumers? If not, you may be heading toward an unsuccessful model.
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If You’re Going After Groupon’s Market, Bring Something Different To The Table
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Google+? That's so this week.
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