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:
People love spending money on Groupon. What’s not to love about getting something you can use with your friends for half-price?
People love talking about Groupon. I’ve overheard girls on the El train getting excited about the weekend Groupon. Groupon is the H1N1 of virality.
Companies love Groupon. I’ve explained the surprising economics of Groupon in a previous post.
Groupon has inspired myriad imitators, but none has captured the same magic of Groupon. If Andrew Mason has a secret sauce, he’s not giving away the ingredient list.
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:
Small-business financing. Suppose you own three restaurants and want to open a fourth. Today, in order to get the capital, you have to go to a bank, apply for a loan, and wait a few months. After the loan is approved, and a year later after construction is finished, you then have to spend a small fortune on advertising in order to get a critical mass of customers to make it a “cool” place to eat. What if, instead, you financed the new restaurant with Groupons that could be redeemed as soon as the restaurant opened? Not only would you get cash up-front with which to build the restaurant, as soon as it opened you would already have an eager customer base waiting to get in the door. Groupon will allow restaurants to take loans from their future customers.
Popular music concerts. Gary Becker, the living legend here at the University of Chicago, has explained how popular restaurants and musical acts are forced to under-price in order to ensure that they retain a critical mass of attendees. Rather than under-pricing tickets, rock bands could sell their tickets at close to the competitive price and use Groupon to ensure that they sell a critical mass of tickets. “If 5,000 people buy a ticket before Sunday, the concert in Cleveland is on. Otherwise we go to Akron.”
Popular music recordings. Music promoters face a problem: how do you convince millions of people to listen to the same thing without giving it away for free? Traditionally, promoters have used a combination of musical tours, massive advertising campaigns, and the occasional payola. For established musical artists releasing a new album, Groupon could put the music promoter out of a job. “If 500,000 agree to buy the new U2 album for $4, the deal is on.”
Online dating. Groupon sells coupons for fun activities. Many of these activities would make for great first dates. It’s only natural that Groupon should help you find a date to go with the activity you just signed up for.
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