Google and Groupon - Who is Crazier?

I was just reading that Google offered to buy the social-commerce site Groupon.com for around $6 Billion…at first I swore the number must have been a typo. Google must be crazy to pay that much. Then I came across another article reporting that Groupon was going to reject the Google bid and remain an independent company. Right now my head is spinning. I can’t decide who’s crazier. $6 Billion seems like way too much money for a website/company whose sole source of revenue is derived from small business.  Furthermore, according to nearly all reports I’ve read (which I will freely admit is not a comprehensive sample), nearly half of the businesses that have tried Groupon say they will not use the service again.

There is a fundamental issue with Groupon from the perspective of a small business. While the exposure and influx of new customers might seem like a positive in the short-term, one must consider the long-term cost. First off all, the business is discounting their respective product or service by 50% or more. On top of that, they need to pay Groupon 50% of the revenue they earn from the promotion. In essence, the company is giving up 75% of their revenue, destroying margins and eliminating profitability (except in a few select industries with extraordinary mark-ups).


Now, you could argue that it’s ok to lose money on a promotion as long as the company is gaining customers and setting the stage for long-term growth and profitability. Unfortunately, that is not what happens in an overwhelming majority of the cases. As has been demonstrated by academic theory and real-world study, price-promotions generally harm long-term brand value (see here). In short, value consumers rarely become brand loyal consumers. They will hop from one phenomenal deal to the next seeking steep discounts along the way. These are not the kinds of consumers on whom you want to base your business.

Groupon is currently enjoying extraordinary success. The founders should be extremely proud of the business they have built and of the impact they have had on group buying and social media. Each day more and more consumers sign-up and take part in the daily Groupon.  However, Google must recognize that the customers that Groupon needs to worry about are the small businesses. As the group coupon/group buying space matures competitors will emerge and small business will get smarter. I have serious doubts that the business can scale enough to cover a $6 Billion purchase price. I’d love to hear other thoughts. Who is crazier? Or are they both perfectly sane?


Good Talk,
Tom