The fundamentals of Amazon's business are much better than Groupon's though. Its still unclear whether or not Groupon is sustainable for merchants. There are two questions that merchants should be asking when they are trying to decide whether or not to run a Groupon:
1. "Will I make money on this offer even after the discount and after Groupon takes their cut?" The answer here is NO for a large majority of merchants, which should lead to question...
2. "Will I attract enough new customers from this deal to account for the lost revenue of operating the deal at a loss?" The answer here for most merchants is "I have no frickin' clue".
Since almost no small business operates at 60-80% margins - the deal discount for most deals plus Groupon's cut is somewhere around this amount - its highly unlikely that the answer to the first question is "yes" for a significant portion of Groupon's merchants. As a result, its my opinion that the eventual success or failure of Groupon is highly depending on whether or not they can do two things:
1. Prove that the answer to the second question is "yes"
2. Prove that the answer to the second question is "yes" more often for them than for their competitors (otherwise they will experience decreasing margins as the space is flooded with competitors)
Groupon can always lower their cut in the future though once they have built out their database of customers. It also wouldn't surprise me if they laid off half their workforce once their rate of customer acquisition starts leveling off.
To do that, wouldn't they have to admit that they aren't growing like nuts anymore, and wouldn't that kill their valuation? (Even established companies like Apple and Google base most of their valuations on the premise of future growth. When the premise of future growth goes away, you have Microsoft.)
It shouldn't negatively affect their valuation. They would still be able to grow at the same rate, but they would do it by widening the channel rather than by acquiring new customers. It would actually be a big win for investors.
My point is that it if the answer to the 2nd question is "no" for most merchants it doesn't matter how much you widen the channel the business is still unsustainable in the long-term. Even so, how do you see them widening the channel? Going into a completely different model that does not fit their brand? The entire discount space in every market is now chock full of competitors doing similar things to Groupon.
1. "Will I make money on this offer even after the discount and after Groupon takes their cut?" The answer here is NO for a large majority of merchants, which should lead to question...
2. "Will I attract enough new customers from this deal to account for the lost revenue of operating the deal at a loss?" The answer here for most merchants is "I have no frickin' clue".
Since almost no small business operates at 60-80% margins - the deal discount for most deals plus Groupon's cut is somewhere around this amount - its highly unlikely that the answer to the first question is "yes" for a significant portion of Groupon's merchants. As a result, its my opinion that the eventual success or failure of Groupon is highly depending on whether or not they can do two things:
1. Prove that the answer to the second question is "yes" 2. Prove that the answer to the second question is "yes" more often for them than for their competitors (otherwise they will experience decreasing margins as the space is flooded with competitors)