A few quick thoughts on group purchasing this morning. We have a pretty unique perspective on this business because our first launch was a local coupon platform. We considered adding group purchasing to our product, but we did not initially do so for a few reasons all related to the fact that we didn't think the business was sustainable. First, we thought the discounts were too high for most small businesses to bear long-term. Second, there was no apparent long-term competitive advantage as the technology and business process could be easily replicated. Ergo, millions of dollars would have to be spent on customer acquisition in a business where competition would drive down operating margins. i.e. bad and worsening economics = no thanks.
Several things happened throughout 2010. Millions of dollars were being earned by Groupon, LivingSocial, and the hundreds if not thousands of blatant knockoffs built by enterprising developers around the world. It wasn't easy answering questions about why we didn't take advantage of this opportunity, and we were starting to question ourselves in the process. Even our partners started to ask about group purchasing more and more as the "lore" of "millions" of "easy profits" became legendary. We reluctantly added group purchasing to the Lasso platform in early 2011, but not without the reservations that we always had about the economics of the business.
Around that time, we had also been brought in to talk about group purchasing with a few companies who were not making the money they expected to make with it. We pretty consistently heard problems related to the economics -- either customer acquisition was tougher than expected, the merchants were pushing back, or both things were happening. I remember saying sometime to someone (can't remember who) in the early spring that the worst job in the world was being an oppressed group purchasing salesperson.
Now after reading Groupon's S-1 in detail, I am a little stunned at just how bad the economics of group purchasing are playing out even for the "market leader". I thought second-tier competitors faced a much bleaker situation than the market leaders. But if Groupon is suffering, who isn't? Maybe the entire group purchasing industry is just a big money burning machine.
Folks in the local media business have taken a lot of criticism over the last decade for failing to modernize their businesses -- more or less for focusing on revenue and not on new business models. That criticism is pretty fair, but it is what it is. Local media companies have operated profitably for many years by doing the same things -- so why would they change significantly especially when executive management just has to keep chopping wood to sail into the sunset for a very comfortable retirement.
But here's what's a bit horrifying for technology folks -- critics at local media companies may just be correct to ignore group purchasing. Unless something changes pretty significantly, group purchasing is headed down a path of other overhyped "technologies" that just don't make economic sense. Group purchasing was considered to be a "no-brainer" just a year ago. Now after reading the S-1, do you still think it is a huge opportunity.
Consider a few numbers from the S-1:
- Groupon lost $420m in 2010 and $117m in Q1 2011.
- Groupon earned $713m in 2010 (far less than the $1-2 billion reported elsewhere), but did earn almost $700m in Q1 2011.
- Marketing + SG&A was 178% of Gross Profit in 2010 and 143% in Q1 2011. Yowza.
So all the numbers say at present is that you can make billions of dollars in revenue if you spend billions and more. I can walk around my neighborhood and give away $1.25 for $1 all day long. :-)
But in all seriousness, the S-1 was really the first time the general public got a look under the kimono of the world's leading group purchasing provider. Here's what it told me:
- Groupon can't continue as is forever. They'll have to get more efficient and/or eliminate some competition.
- They'll have to become considerably more innovative. Groupon Now is one such innovation, but even that will take considerable marketing funds and great execution to work.
- Being a group purchasing provider is a really terrible business at scale. I don't doubt that smaller companies can be profitable winning a niche, but local group purchasing done at scale all around the world is tough especially as competition intensifies.
- Group purchasing, as it currently exists, cannot win the local advertising market. In a business where nobody involved in the transaction truly wins -- the provider or the local business -- interest will fade.
- New media companies that thrive in the coming decades will effectively combine content, local advertising, and services for advertisers as an agency would. I particularly like the work that our partner, Culturemap, has done with their "hybrid" new media play.
Deal data has always been the name of the game -- and will define the future of this business. This is why I like aggregators who rise above the fray -- Yipit is one such company. It's also why I think Facebook has gone the aggregation route as well. More to come on this as it all plays out.