The High Value of Discount Prices

From The Wall Street Journal:

Until the fall of 2010, the trajectory of deal-a-day coupon site Groupon.com had methodically checked off all the major milestones of an overnight Internet success story. In less than three years, the company flirted with premature death, found sudden breakthrough success, attracted a swarm of deep-pocketed venture capitalists and a media hungry for the next big story, and, finally, found itself the target of a technology giant looking to pick off a potential competitor at a price that had Internet insanity written all over it. The technology giant? Google. The offer? $5.75 billion. The answer: No.

In “Groupon’s Biggest Deal Ever,” Frank Sennett, the editor of Time Out Chicago, traces the astounding success of a company that set out with a simple goal: to bring local commerce into the Internet era. The tale culminates with the November 2011 initial public offering that made its founders rich—the company’s $12 billion valuation at the time of the IPO was more than twice Google’s offer. The public offering, which raised $700 million, was the biggest technology offering since Google’s $1.7 billion IPO in 2004. While the episode is hardly the utter triumph that the author portrays it to be—in the first six months after the IPO, the company’s value dropped by half and now sits at $7 billion—the story behind it is certainly perfect for would-be entrepreneurs with a dollar and a dream.

Groupon’s business plan was always easy to grasp. Start with the fact that it is difficult for small-business owners to justify any sort of an Internet presence beyond a landing page and directions to their door. Add to that the fact that most business owners will offer discounts to attract new customers. Enter Groupon with its discount template and its catchy, sometimes absurdist, marketing copy written by 20-somethings who would rather be on stage at Second City.

Here’s how the bargain works: The small-business owner offers Groupon’s customers a 50% discount if they buy an online coupon for the product they want to purchase. Groupon takes half of the discounted price—which means, of course, that the small business is really getting just 25% of the full price. If customers like the product enough to buy it again (and again) without a coupon, paying the regular price and even branching out to other product lines, the cost of “customer acquisition” for the business will prove worth the initial discount, and everybody leaves happy: The small business gets new customers, the customers relish their half-price deal and Groupon takes a healthy cut of that first purchase. Mr. Sennett calls this a “non-adversarial business model,” and he is right, as long as everything goes as planned.

Continue reading the rest of the story on The Wall Street Journal