Social media could kill Groupon

on May 31st, 2011

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Tim Beyers from The Motley Fool has an interesting story published on MSNBC analyzing the strategic positioning of Groupon. Even though the social buying giant is still dominant in the market, its business model seems to be in real danger. Beyers concludes that “Groupon is in a race with Google and Facebook and more than 400 other would-be couponing kings. All signs point to social skill as a prerequisite for sustainable profit when anyone with an Internet connection and a little coding talent can get into the business of distributing e-deals.” So let’s explain it. Groupon’s business model is very simple and therefore easily replicable. The entry barriers are very low. Almost everybody with some website development skills can design and kick off a Groupon-like website. The only big issue is the marketing. The conversion rates for e-commerce websites are usually very low. Groupon’s conversion rate is less than 1% (meaning less than 1% of visitors to the Groupon’s website actually buy something on it). So the small companies will struggle to achieve traffic large enough to conduct a meaningful business. Nevertheless, companies like Google, Bing or Facebook don’t have such a problem. They already have large presence in the internet and can take advantage of the economies of scale. Moreover, websites like Facebook also have a social networking component which is very powerful among the U.S. consumers, who spend considerable time on social media sites. Groupon seems to realize that the real danger is coming but still it is rather slow to respond to it in timely fashion. Only two weeks ago the company kicked off a smartphone app Groupon Now! for finding nearby deals in selected cities. Why did they wait so long to do it? Anyway, it will be very interesting to see how the competition between those internet giants unfolds.