With group buying being the next big thing, I thought it would be a good time to talk a little bit about one of the more well known companies in this space called Groupon. Another reason is that here in NL, the market is small, and Groupon is the only company who is locally on the ground.
Group buying isn’t a new concept, but is something that has only been brought into the mainstream in recent history. As someone who thoroughly enjoys obtaining a good deal, the concept of getting local deals at 50% off (or more) is enough for me to willingly open my wallet.
About Group Buying
Groupon, like others in the space, all have a very similar business model, but Groupon is the largest of the group. Their model is to create deals with local businesses for local residents. For example, Groupon would approach a local popular restaurant, and negotiate a 50% off coupon (eg. $30 off $60 meal) in exchange for attracting a required number of local customers. Groupon would in turn offer the 50% off coupon for their members and collect a share of the revenues.
When I first heard of this model, my first thought was that the business would be losing money so why would they do it? They are likely losing, but in reality, it’s a pretty cheap form of advertising and it’s bringing people in the door which is quantifiable. So it’s a win-win-win situation, the business may reach out to new customers, the customer gets a deal, and Groupon generates revenue from every transaction.
Groupon Valuation and IPO
It appears that the group buying business can be very lucrative! It’s rumoured that Groupon (and others) collect up to 50% of each deal. So if, for example, a restaurant offers $60 meals for $30 and sells 1000 coupons, that would be $30,000 in total revenue. As these deals typically run for 24 hours, that’s $15,000 for Groupon and $15,000 to the restaurant in one day! Combined with multiple deals, multiple cities and countries, it can lead to some serious numbers.
Groupon is doing so well in fact, that they plan on doing an IPO later this year. If you’ve been following the tech news, you may have heard that Google offered Groupon $6 Billion to take over the company. With apparent $800M in revenue, that’s an offer of 7.5 times sales. It appears that Groupon is profitable, but earnings have not been announced. While I thought that was a rich offer, Groupon turned it down! But now we know why, they plan on doing a $15 Billion Groupon IPO relatively soon. Unless their earnings can backup that valuation, it’s unlikely that I’ll be adding Groupon to my RRSP.
My Experience with Groupon
Now I can’t write about my group buying without trying it out myself. Groupon has an easy interface and an even easier registration system (name, email, password) which is common in social media type sites these days. A few days after signing up, I received an email about a deal with a local specialty grocery store that I’ve been meaning to try out. The deal was $20 for $40 worth of groceries, and as we’re going to spend money on groceries regardless, I thought it was the perfect opportunity to give the store a visit.
After paying online for the deal, I received an email shortly after that included the coupon to be printed off. If you’re anything like me, you may be thinking how a store like that tracks these coupons and how do they prevent fraud? Anyone can generate a similar coupon with basic wordpressing software. The answer came when I used the coupon in store. For this particular store, they had a printed folder that included every coupon purchased, the coupon number along with name of the Groupon member.
Overall, I was very pleased with my experience and will continue to watch out for local deals of interest.
As I mentioned, there are a growing number of sites that offer the same group buying opportunity. Which ones have you tried? Which ones do you like best? The market locally is pretty small so I don’t expect too many other sites to join Groupon in NL.
Disclaimer: There are referral links in this post.