In my last post I discussed the weak Network Effects of Groupon Business Model. Groupon clearly understands this problem of weak (or, lack of) network effects; Group CEO Andrew Mason said Groupon is the "N Sync of Websites", and acknowledged that Group Buying is not a winner takes all market. Groupon also has a long line merchants waiting to run their deals in the Groupon site. One way to increase the network effect is to become a deal marketplace for local businesses. Groupon will drive traffic, and merchants run deal on a pay for performance model. Not surprisingly, Groupon recently announced the launch of ‘Groupon Stores’; according to Groupon’s blog, “With Groupon Stores, businesses can now create and launch their own deals whenever they want. Think of it as the online equivalent of a merchant’s physical storefront.”. The blog also says “Today things are different – our biggest problem is that demand is so high, merchants often wait months to be featured. And while we once only had a few thousand customers per city, now we have hundreds of thousands (Chicago just added its millionth subscriber!) – making it increasingly difficult to find one deal that satisfies everyone”
Some of the implications of Groupon Stores for Groupon that come to my mind are:-
Strengthen Network Effects. Surely, introduction of Groupon Stores will significantly help several hundreds of merchants to run their own deals in Groupon. This is likely to attract even more users, and contribute to the existing weak network effects.
Scaling business without costs. Because merchants would be signing up individually, there will be limited requirement of sales force, and since merchants will run their own deals, there will be no added requirement for copywriters. Essentially, the cost of adding a new merchant under Groupon Store is not significant.
“Freemium” Customer Acquisition model. Groupon Stores allows merchants to try the effectiveness of Groupon, at a low cost, before they sign up for the Home Page Deal with Groupon. For Groupon, this is also an easier way to acquire new customers.
Deal discoverability and Conflict of Interest: Users primary discover deals through the daily emails that Groupon pushes to its users. In Groupon Stores, there will be some algorithm that Groupon will run to select and feed the best deals to its users. I see a conflict of interest here: Because Groupon takes 10% of the deal value, all other things being equal, it is incentivized to push the deals that has more revenue potential. For Groupon, merchant A offering a 50% discount off massage deal worth $250 is more likely to be worth less than merchant B offering a similar service for $100, or worth less than merchant C offering boating trip worth $300. I want to see how Groupon is going to balance the different sets of incentives, and feeds the deals.
Need for good Search and Recommendation Engines. I suspect that it might be possible for users to directly visit Groupon’s site and browse for deals. I hope Groupon builds a powerful recommendation engine to help the user discover the products/services (s)he may like. Also, Groupon must have a powerful search engine to help users search for deals.
Need to Manage Merchant Entropy. In an open for all model, Groupon is also likely to attract merchants who are less than ideal to do business with. There might be an increased requirement for customer support, and fraud prevention. What if the merchant doesn’t honor the deal? Groupon will refund the money to the user, but what systems are going to be available for the users to give ratings to merchants? Can other users base their purchases of deals, on the ratings of the merchants? As the number of merchants grows, how can Groupon keep the climate of trust intact?
If not executed well, Groupon is likely to enter the murky waters that eBay is struggling to get out. That said, I am excited to see how the Groupon Stores changes the game for local businesses.
