Here's my Grand Unified Theory of GroupOn (GUTOGON)

Here's my Grand Unified Theory of GroupOn (GUTOGON):

GroupOn is at heart a coupon site. They've done 2 things to separate themselves from normal coupon sites: Pre-purchasing & Very short-deal duration.

This model has helped preserve retailer margins by preventing widespread use of coupons by casual customers. It's also a good model for forcing customers to make "mistakes" (i.e pre-purchasing deals they will not really want/use). Over the long-term though, it's a very customer-hostile model. There are very few business which try to force a pre-purchase model, and when they do it reflects the underlying business reality where capacity is limited (such as a non-refundable plane ticket). Even a single "bad" experience where a coupon goes unused, will tend to turn customers away as people remember bad experiences more strongly than good ones.

I think GroupOn has also done a few things which have helped them but are not sustainable. First, the core GroupOn audience has been tech-savvy, early adopters. These people are great for lead-gen, as they are good (non-price sensitive) customers. As GroupOn becomes more widespread they will find (as every other discount site has discovered) that discounts attract the price-sensitive.

Here are my GroupOn predictions:

1) Customer quality declines. As GroupOn becomes more well known, it will attract more bargain seekers. The # of long-term customers as a % of coupon users will drop.

2) Competitors will make deals ubiquitous. One-deal per day makes GroupOn's model work. If 50% coupons for tanning were constantly available, then there would be no urgency to purchase and consumers would simply wait a day or two for their discount. I suspect that is what will happen as competitors make local deals more prevalent. I think the long-term equilibrium is for limited discounts among established businesses, with only newer and weaker competitors offering larger discounts.

3) Competitors will shrink GroupOn's margins. Everyone with a mailing list can emulate GroupOn and there don't seem to be any economies of scale- as long as you've got enough email addresses in a given locale. They have some first mover advantage, and they are turning away business customers now, but as customers get burned with breakage, businesses get burned by discount seekers, there will be fewer clients and more competitors for GroupOn.

4) GroupOn will focus on highly specialized businesses with low customer churn. These are niche businesses who are competing for attention - things like Rock Climbing, Pilot lessons, Cooking classes. These businesses are very specialized - they need the mass distribution of GroupOn, and they can afford to offer a a low-priced "intro" deal since each new customer is worth $100's. They also have little competition- so once a customer is hooked they are very unlikely to defect to a competitor and also unlikely to find a new GroupOn deal for a competitor.