Groupon has blown up in the past year and has surpassed a valuation of over a billion dollars. The company has also spurned a litany of copycats including BloomSpot, Yipit, LivingSocial, and tons more both in the U.S. and local markets abroad. Other sites focused on local businesses, like Yelp (who completely missed the boat on this and the FourSquare model), are also now trying to get in on the action.
While Groupon is making heaps of money, they must be worried about the huge list of competitors and their lack of any real competitive advantage other than being first and having more traction. I was told by a source at Groupon that the number of people receiving their daily deals in New York and Boston now exceed more than 400,000 each.
As a result, they recently changed their model in hopes of broadening their reach. There is so much demand from businesses to take part in their daily deals, despite recent backlash, that businesses who want to participate generally have to wait a month or more before they will be featured.
The newly opened Groupon Store allows small businesses to create deals on their own that will appear on the site in less than a week. In many ways for stores this is a better deal as Groupon’s cut is only 30% compared to their usual 50% cut of the daily deal.
I had no idea until I spoke with Groupon that they took such a large percentage of the revenue from these daily deals. This means if you buy a Groupon for $4 for $12 worth of food at a restaurant, the business gets $2 for your $12 sandwich. For businesses this turns into a pure customer acquistion play that often does not work out for them in the end. One popular story making the rounds on the internet last month was from a business owner who had to take out an $8000 personal loan to cover the costs incurred from their Groupon.
So the new Groupon Store seems like a good idea for businesses who can now keep a larger cut of the revenue and get their deals up much faster than in the past. However, for customers, there will now be many more deals to sift through with offers that will probably be far less compelling that the ones seen in the daily deals.
Eric Bernhard posted this astute observation on Quora in regards to this new model: “By moving into a self-service model Groupon has essentially turned itself into a coupon provider. As it is right now they are having difficulty maintaining a high level of deal quality (the real value proposition in the industry). When there is no moderation the quality of the deals will drop and people will stop buying.”
In addition, Groupon is hoping that users will start following businesses as they update their specials over time. But the reason the Groupon model worked was because they cherry-picked the best deal of the day for it’s users. When users get lost in the noise of all the deals, Groupon may also get lost in the noise of all its competitors.
Bonus: You can go here to see the worst performing Groupon of all time.
Author: Keith Baumwald is Director of Marketing at GroundLink, a travel startup based in Manhattan. You should follow Keith on Twitter @keeftronics