There’s a big difference between internet bubble Mk I and the one brewing in daily deal sites such as Groupon (known locally as Stardeals, Cudo and Scoopon) the owners of which recently received an $80 million investment from a group including James Packer, who is now in the cybersquatting business.

It took eBay about six years before it became profitable. Groupon’s growth and profitability makes that look pitiful. Former Starbucks CEO and eBay board member Howard Schultz says these companies were “standing still compared to Groupon”.

Groupon sold its first deal — to a joint selling half-price pizza at the base of its Chicago office block — in November 2008. Fourteen months later in January 2010 it made sales of $11 million. By December that figure had reached $89 million. Annual revenues were estimated by The Wall Street Journal to be $760 million last year. This year, Business Week estimates revenues will be $3 billion –$4 billion.

The company is growing so quickly it already has 6000 employees, some of whom work in corridors while others hold meetings in local churches because their Chicago offices are too small.

But what’s really impressive and likely to have caught the attention of Packer and Google, which last year tried to buy Groupon for $6 billion, are the margins on those revenues. With Groupon keeping 40%-50% of the revenues on each sale, they’re almost certainly huge. For an internet company not yet three years old, they’re astonishing. Only rapid growth and incredible margins can justify a rumoured $25 billion float and that’s what Groupon appears to have.

Long term though, it’s hard to see how those margins will hold up. Daily deal sites don’t seem to have any discernable competitive advantage.

First, the technology is easily copied. There are more than 100 US competitors to Groupon, including Jewpon — group deals for Jews in New York and Haifa — and gluten-free deals — for people that live, in all likelihood, Portland. Even internet laggard Harvey Norman is getting in on the act with a site so bad it looks like it was designed by one of Gerry’s horses. All are competing on price.

As for distribution, Groupon’s tens of millions of users are a weak defence against them. According to Experian Hitwise, only about 10% of visits to local daily deal sites originate from email. Google Adwords and social media, both of which competitors can easily access, are the major traffic drivers.

Already, Facebook groups are being bought and sold to increase distribution. And the business model encourages a person to rope in friends and colleagues to get a deal activated, making it easier, not harder, for new market entrants. Brand loyalty, to the sites or the retailers making the deals, is almost non-existent. Everyone is motivated by price.

Daily deals may work well for high fixed-cost businesses and those suffering cashflow problems but targeting the tightwad market isn’t a great strategy for retailers competing on service and quality.

So, if Groupon has a competitive advantage, where is it?

In highly competitive markets, companies can prosper simply by doing the same things better than everyone else. That seems to be Groupon’s approach. Retailers speak highly of how well Groupon works to understand what works for them.

Then there’s the pitch itself. According to Business Week Groupon employs improv actors and 70 comedy writers. When a deal hits your inbox or Facebook page, they make it interesting and witty enough to get you to actually open it.

This Groupon office photo tour, replete with beds and toilets, offers a fascinating insight into how this culture works.

If this is Groupon’s real edge, it would be a fascinating development for online businesses, away from a technology-led model towards something far more traditional; where the real value is in how words and phrases are strung together rather than ones and zeros.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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