Groupon

Harvard Business Review has an interesting article by Joshua Gans about Groupon:

Here’s my hypothesis about Groupon’s success. It exploits a limitation faced by many consumers: their memory.

I think his hypothesis is wrong. Groupon isn’t mostly about memory. It’s about aggregating a wide variety of coupons that feature, usually, a very steep discount. Before Groupon, it certainly was harder to collect coupons, but doing so was also much less valuable. Saving $0.50 on my next loaf of bread is not in the same category as 50% off a flying lesson (so much looking forward to using that this summer). The Groupon model works not because it’s a memory aid, because it’s not a very good one. It works because the service it offers is easy, valuable, and exciting.

With that said, I agree completely that Groupon has a tough road ahead if it wants to remain king of the mountain. It would be nearly impossible for Groupon to continue to enjoy its healthy market share as more competitors get into the mix and as innovation slows down (although Groupon Now! will be interesting to follow, it won’t take long for competitors to catch up). I’m sure I’m suffering from lack of imagination, but how much more can they really shake up the coupon market before the playing field levels? LivingSocial is already, anecdotally, gaining ground in DC with its instant deals, practically ideal for the working professional’s lunch hour.

But right now, there is one issue on which every economist I know of actually agrees (and in an unqualified way): that Groupon (a) should have accepted the purported $6 billion bid from Google when it had the chance; (b) that Google was insane to have offered it; and (c) that Groupon is pretty much doomed or, at least, will have fleeting glory.

In the end, I think Groupon will face many of the same challenges as Netflix. Although they have a good head start, there are many companies who want a piece of the pie and who can mobilize lots of capital against you.

How much does first-to-market matter for internet companies? Unless you’re offering something substantially different from your competitors (Groupon and Netflix are not), about all you have to bank on are ease of use and customer base. If I were Groupon, I’d be very afraid that Google and Facebook want to move into my territory with their already established customer base. Likewise, if I were Netflix, I would be scratching my head hard to figure out how to differentiate my product from Amazon, iTunes, or cable.

So, Groupon, I hope you feel secure turning down the $6 billion bid. Best of luck. From Google’s perspective, I have a hard time believing that it would cost them more than $6 billion to establish a superb competitor, especially considering that audience capture is already in the bag.

A longer-term question will be whether “coupon fatigue” sets in. With people like Seth Priesbatsch and others looking to expand this world even further, I can’t say I’m looking forward to a time when if you’re not getting an automatic 70% off a purchase, it doesn’t feel worth it.

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