Thursday, March 10, 2011

Groupon & Its Competitors

I was very intrigued by a recent Wall Street Journal article discussing competitive risks for Groupon, the company that combines couponing, social networking and local business.

The article cites Groupon as potentially earning $1B in revenue for 2011, but then notes that the online couponing business has low barriers to entry. The trick, it contends, is pairing large pools of email addresses/subscribers with large pools of merchants. For that, it names Google and Amazon as the two most obvious potential competitors to Groupon.

Google's $6B offer wasn't sufficient to buy Groupon, but it does have the necessary pools of potential customers, as well as existing merchant relationships. Amazon, the Journal piece notes, currently backs LivingSocial, Groupon's most significant existing competitor, with 20 million subscribers to Groupon's 60 million.

The article mentions a national coupon deal LivingSocial did for movie tickets through the online service Fandango. It drew a million responses as of noon of the day the article went to press. It also cited Groupon's largest offer, which was with Barnes & Noble, garnering 700,000 respondents.

What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time.

Regardless, it's clear that by starting with national vendors, an online coupon competitor can rapidly build a subscriber base, then slowly move, locale by locale, into individual markets. Of course, once you have even three competitors, the revenue split becomes a weapon to be used to lure vendors to a specific competitor.

As the Journal article noted in closing, perhaps the Groupon owners should hurry along on an IPO, while they still have such a high market value. Once large competitors really get rolling, that value could shrink surprisingly quickly.

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