Is Groupon The Next Google?

By Evan Miller

April 15, 2010

I met the CEO of Groupon fifteen months ago at ORD Camp. At the time Andrew Mason had six employees, a little bit of angel funding, and a sheepish face when he explained that he was in the coupon business.

Groupon is now a one-billion dollar company with hundreds of employees. How can a two-year-old coupon company be worth a billion dollars?

I don’t have any of their figures, but I thought I’d sketch out a few reasons I think that, if anything, Groupon is severely undervalued. First, the obvious:

So OK, if Groupon starts operating in every city in America and most cities in the world, saving millions of people hundreds of dollars each year on sushi, spas, and baseball games, that could be a billion dollar company, right? Call me crazy, but I think a billion is too low. Here’s why I think Groupon will be “the next Google.”

First it helps to understand the current Google. Where does Google make its money, some $20 billion a year in revenue? Casual observers say “search ads.” Sergey calls it “contextually relevant advertising.” Neither description really explains why a single click on a simple text ad can be worth as much $50.

Google’s core business is selling business relationships. When I search online in order to buy something I’ve never bought before – say, a potted plant – and I choose a particular potted plant vendor, in the future I am more likely to revisit the same potted plant vendor for all my potted plant needs. So from the perspective of a business, the value of reaching me first isn’t just the chance to make a single potted-plant sale; it’s the value of all the sales they’ll make to me in the future, plus the value of me recommending the vendor to all of my friends. It’s the value of gaining a customer.

Google auctions off its search ads. How much money will a company bid for one of those ads? Whatever they think a new customer is worth. In this way, Google is able to keep for itself most of the value that its advertisers get from having a potential customer click on the ad. Sure, as a customer, I can spend enough time comparison-shopping to make the ads they show irrelevant to my final decision, but a lot of people are happy to buy from the first vendor that seems reputable. (Herbert Simon, one of the greatest economists of the last century, called this cursory-search behavior “satisficing,” as opposed to the time-intensive process of “maximizing.” Google makes all its money off of us satisficers.)

Back to Groupon. Like Google, Groupon is selling business relationships and they are in a position to extract most of the long-term value of those relationships. Groupon mainly sells vouchers for activities that its subscribers have never tried before: stone massages, skydiving, fitness classes, boat tours, funky restaurants, and so on. The value to each of these companies is not merely accessing the golden football, but also the chance to acquire a large set of lifelong customers in the process – customers whose first experience with the company is likely to be positive since 1) the customer got a great deal in the form of the Groupon and 2) the customer likely brought along friends to “help me use my Groupon.”

How does Groupon extract all that value? Essentially it’s the same way Google does: selling the scarce resource of a person’s attention to the highest bidder. Groupon cleverly offers only one deal per day, and they can give the deal to the company that is willing to pay the most for the privilege. Right now Groupon takes a commission on each coupon sold, but there’s no reason that Groupon couldn’t charge businesses even more than the nominal value of all the coupons sold in exchange for the opportunity to be listed – after all, Groupon is selling business relationships, which are much more valuable than the individual sales.

So despite the fact that the world’s largest search engine and a popular coupon mailing list appear to be as closely related as Barack Obama and Dick Cheney, the core business model is essentially the same. I imagine the market potential for Groupon must be comparable to the market that Google has discovered for its search ads, but of course the two companies are not in competition. Google helps people find businesses they know must be out there, whereas Groupon helps people discover businesses they never knew existed. The two companies are complementary.

Groupon is onto something big, and I think in a few years we can expect them to break into some large and unexpected markets. Namely:

Is Groupon the next Google? No, I don’t think so. If, in addition to its growing trade in coupons, Groupon becomes the primary financier of the restaurant industry, the kingmaker of the music business, and the long-awaited overlord of the dating world, they’ll be even bigger. The question dripping from every investor’s tongue will cease to be “What's the next Google?” and become the same as that pondered by those giggling girls on the El train: “What's the next Groupon?”

1. Becker, Gary S. “A Note on Restaurant Pricing and Other Examples of Social Influences on Price” The Journal of Political Economy, Vol. 99, No. 5 (Oct., 1991), pp. 1109-1116

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