03 September 2010

grouponomics - is the search over ?

Its no secret that the advertising landscape is changing. Newspapers are folding one by one. TV content and advertising is moving online. I just got an ESPN magazine offer for 96% off the cover price, and it's still 4% too high for me to pull the trigger. We know where the lion share of the shift is going. Google's run-rate revenue based on its last quarter is a whopping $24B. But has Google's core business peaked ? Is paid search advertising dead ? Already ?

A few weeks ago Groupon featured a fairly innocous deal of the day : "Gap $50 certificate for $25." It got almost 500,000 purchases, before they had to literally turn down the site. Nice way to reach a targeted audience (young, affluent, savvy) for Gap eh? Groupon's take: roughly $7.5M.

Groupon, a primarily local-advertising "deal of the day" website (and others like it) have become increasingly relevant. It charges anywhere from 30-50% of the advertised value per purchaser, with no upfront fees. Smart in my opinion - its the broker's model. Take nothing upfront and charge more than your service is worth on the backend for a product you know will move. It's a work of art - it's simple, scalable, and has tremendous upside when you take into consideration campaigns such as Gap. A pure money grab for Groupon if you ask me.

So was it worth it for Gap ? It cost them $40 a pop or ~$20M when you take into account the 50% discount they offered. Its debatable. Were these existing customers? Either way it came out of their fixed marketing budget. They took it out of tv, print, and perhaps Google search.

Others also see this shift in online advertising. Social marketing sites such as FB or Groupon have more captive eyeballs, higher conversion rates, and are cheaper (right now) than Google's PPC. In the case of Gap, they were guaranteed business (they paid per customer). I personally don't know if i'd trust a friend over google, but the number of users are startling -- FB is at 500 million; even Groupon is at 3M in just a few short years. Yahoo and AOL's search businesses are down sequentially, and Google's growth rates have slowed - so it's still unclear if paid search has already declined. Google could answer that question definitively for us as they use an auction model to price their search ads. If prices came down, so did demand.

I like Groupon's model than others because its easy for traditional advertisers to understand and its far more lucrative per user. Also, its a direct solicitation model (people know they are going to be "sold" something) versus companies like FB, where you have to trick people into being advertised. I read somewhere that a blueberry company paid Zynga to use their brand of blueberries in their Farmville game. That's ridiculous. And more importantly, harder to monetize.

I'll miss the kids jumping in Denim on TV, and i'm certainly not predicting the demise of Google. But Groupon just got $20M of Gap's budget in one day. So perhaps tomorrow's deal might be 50% off Google Ad Words for Organic Blueberries ?


  1. A lot of information and thoughts here....world seems to be moving faster than I can keep up...and I am still a yougen ?!

    It is interesting the advertising strategy of google vs. groupon. Do you think slckdeals.net helps advertise too? What about these shopping tickers? What innovative method will they come up with next? It is a generation of shopper - online shoppers. No matter what you try, seems to be a hit almost. Just use social media to advertise it (or not) and then everybody knows about it.

    Makes me want to just try out any crazy idea that comes to my mind....

    Makes me wonder how accountable people hold the black box - for all the payment purposes. I am very surprised credit card, paypal accounts, havn't been broken into a lot more than usual. Things get done so much faster - is that a good thing ?

  2. @atmabus Everyone keeps bringing up the cost of what Gap pays. They got customers, that's what they needed. I'm sure their clothes already are marked up over 50%. So, they just earned less profit. Plus, it's end of season, so it's good for them.

    @Priya Many things will make it big, it's just hard to come up with the idea and then actually implement it before someone else does. As Nike says "Just do it!".

  3. Good point on the Gap markup. Its probably a net gain for them, although $20M had come out of their marketing budget, presumably at the expense of other mediums.

    I agree w/ Priya - it will be interesting to see what other advertising models come out since online commerce is really in its infancy.

  4. for most companies, groupon is purely customer acquisition, and it works extremely well. we've run quite a campaigns with them, and it's break even if not a loss, but lots of new customers.

  5. I love the idea of making money without "doing anything" - what Groupon is doing is smart and makes great business sense. Advertising on Google can get expensive, and figuring out how to become one of the top 3-4 results from a Google search is mind boggling. Groupon should try and become the online version of the Monthly Mailer, a collection of coupons from local establishments that is mailed out to households monthly- companies pay someone to mail them out, but they arrive in the hands of those most likely to use them. If Groupon can achieve this, they can probably charge even more money for their increasingly happy customers.

  6. Good point. I won't be surprised if an investment firm tries to marry an offline with an online strategy. Makes perfect sense.