I’m a daily deals skeptic. I don’t wake up in the morning and think, “I wonder what I might buy today?” But I also remember being skeptical ten years ago that Amazon would be able to extend its retail model beyond books and music.
It didn’t matter that I was a devoted Amazon customer. My mental model was missing something then, about how both businesses and consumer behavior work. And that makes me wonder if I’m missing something now.
Friday morning, Chicago-based daily deals site Groupon raised $700 million in its initial public offering. Demand for shares in the first round drove the initial share price to $20 (up from the mid-to-high-teens) and led to Groupon issuing 35 million shares, not 30 million as originally planned.
Even though that means only a little more than 5 percent of the company that’s now available for public trading, the $700 million raised (valuing the company at $12.8 billion) was the most raised for an internet company’s IPO since Google’s blockbuster $1.7 billion opening in 2004.
Google went on to become a nearly $200 billion company, pivoting from its baseline business in search to software and services. Amazon weathered the dot-com bust to improbably become not just a multifaceted retailer, but a major technology player. Nobody wants to miss out on an opportunity to catch a rising star like that again. Groupon may not become Google, but they doesn’t mean they won’t become bigger and different in ways we can’t imagine.
Right now, Groupon’s business model is powerful but limited. The company strikes deals with local retailers for sharp discounts on products and services for a limited number of customers. Customers buy the deals from Groupon — there’s a limited time, so act now! — who splits the revenue with retailers for redeemed coupons, and keeps it for unredeemed ones.
On its face, that’s an easy model to copy. LivingSocial is just the most notable of many similar startups, and Google’s already gotten into the game with its Offers site (after having been earlier rebuffed in an attempt to buy Groupon outright). The worry for Groupon investors is that Google or some other giant squashes it like Microsoft squashed Netscape.
Part of the problem of building a customer base filled with people scouring for the best deals is that they’re always looking for a better one. This is also a problem for retailers, who are hoping to use Groupon to generate repeat business; it doesn’t work if Groupon users just move on to the next deal.
But maybe discounts are the wrong way to think about Groupon. In an ever-so-slightly-sensationalized CNN story on “Groupon addicts” — the company does have a “Groupon addiction hotline,” but it’s mostly a combination of customer service and a joke — Groupon’s Julie Mossler says something wise:
What’s interesting is that we find the customers that buy the most tend to buy the most expensive ones… They’re not buying 60 Groupons because they’re cheap and on a budget; they’re buying them because they’re adventurous.
And the site does appeal to that sense of adventure. Philadelphia’s featured Groupon deal today is for a Chocolate Tour — a guided, multi-retailer spin around the city. It’s the kind of thing only a third party with a dedicated clientele and good retailer relationships could assemble and sell at scale.
Groupon may be able to position itself as a premium discounting site, not just selling deals but experiences. Or they could do something else entirely with those millions of dedicated daily readers. With extra capital raised through the IPO, they have any number of ways to differentiate themselves from competitors big and small.
Not convinced? Yeah. Neither am I.