I continue to be interested by Groupon’s ability to attract thousands of small business customers, but very few from the auto repair industry. Now that Groupon has officially declared its intention to go public, I figured a reading of the company’s S-1 filing might explain this peculiarity. During this exercise, a number of interesting facets of Groupon’s history and business model stuck out. In no particular order:
- “The Point”: Groupon started as “The Point,” a web site meant to mobilize social action if a large enough number of individuals participated. Unable to gain traction or find a business model for The Point, a pivot towards mobilizing social commerce gave us Groupon.
- “Groupspawn”: CEO Andrew Mason writes a personal note to prospective investors about the quirky history and culture of Groupon, promising that these unusual characteristics will continue and are, in fact, critical to the company’s long-term success. One story mentioned off hand by Mason is a promotion called “Groupspawn,” in which Groupon awarded college scholarships to babies whose parents used a Groupon on their first date.
- Chicago Improv a core part of Groupon’s culture: Groupon recruited heavily from the ranks of Chicago’s improv scene for its customer service staff, in keeping with the company’s core philosophy of delighting customers. Apparently, improv comedians can handle frustrated customers in an affable way. A great insight into customer service, and probably a nice way of keeping the office atmosphere fun and collegial.
- Breakdown of Groupon merchants by type: Page 70 of the S-1 provides a nice breakdown of Groupon merchants by type of good / service offered. See below.
That health & beauty is the largest category is not stunning (take a look at most daily deal e-mails and you’ll see a disproportionate number of massage, gym and spa deals), but it still interests me. Part of what’s going on is that the economics of these businesses lend themselves to deep discounts. A spa, for example, is a business centered on significant mark-ups on labor. Offering a large discount on a service that has already been marked up substantially can make a lot of sense. Throw in that nearly everything else in a spa is a fixed cost – rent for the building, equipment and furniture, and so on – and a deep discount offering begins to make more sense. Finally, because a core problem for spas (and many small service businesses) is getting first-time customers to “try them out,” a deep discount Groupon becomes a home run promotion.
The other undercurrent here, not mentioned in Groupon’s S-1, is that the overwhelming majority (77%) of daily deal subscribers are women.
- Groupon has 6 different product offerings: Groupon is known for a single daily deal, but markets six different options to merchants:
1) Featured Daily Deals
2) Deals Nearby
3) National Deals
4) Groupon NOW
5) Deal Channels
6) Self-Service Deals
The word “featured” in front of daily deals should give us a sense of the sales tactics used with merchants. A typical small business will often try to dip their toes into a new offering by asking vendors for the simplest, cheapest offering. Down the line, says the small business, they will try the more expensive offer. The Groupon sales rep can respond by referring to options #2 and #5, less costly deals that are not featured prominently in Groupon e-mails, and option #6, where the small business does everything itself. Option #6 is almost certainly a non-starter for a business owner – this is a tough learning from our ClearMechanic experience and is borne out by the poor performance of the Groupon self-serve product. Options #2 and #5 can be “undersold” by the rep by pointing to data about lower conversion rates for non-featured deals.
- What are Groupon’s (real) advantages over competitors? David Bonderman’s statement that “Groupon doesn’t do anything that four of us with a phone couldn’t do” immediately came to mind as I reviewed Groupon’s discussion of competitive advantages. (See pages 1, 2, 13, 14 and 82 of the S-1, among other places). Groupon’s competitive advantages come down to two things: 1) brand and 2) a critical mass of consumers and merchants.
This “critical mass” advantage is not as compelling as, say, the network effects experienced by social networks. For example, I’m unlikely to join a Facebook clone; but I’m very likely to join multiple daily deal sites. Still, there is something to the critical mass argument:
1) A small business that goes with Groupon for a deal promotion instead of XYZ Groupon Clone can be assured that a healthy number of new customers will walk through their door once the deal commences.
2) Groupon can convincingly argue that their deal e-mails are targeted towards subscribers who may be more interested in certain deal types. Only a business with critical mass and a long operating history will have this type of data.
3) Groupon NOW, the mobile platform offering instant deals, requires “deal liquidity” for consumers and “consumer liquidity” for merchants. A consumer does not want to look for instant deals at noon and find nothing in his / her zip code. Similarly, a merchant does not want to gear up for a rush of customers at lunch, only to find that its deal vendor couldn’t reach enough subscribers in the neighborhood. No one except Groupon and Living Social currently has the merchant and subscriber bases to pull off instant deals. This is compelling.
- E-mail and “push” promotions are still key: For all of the sexiness of mobile applications and social network sharing, 60% of consumers access Groupon deals through e-mail messages. This TechCrunch article provides a nice breakdown, based on a recent comScore survey. The next highest method of accessing deals is visiting the Groupon web site, at 21%. E-mail is so critical to Groupon’s business that it received a separate “risk consideration” paragraph in the S-1 (see page 15.)
As more information comes out, I’ll add to this post.