Groupon and Living Social Valuation Bubble

Groupon and Living Social Valuation Bubble (Everyone can do what they do – and better in many cases) by Kenneth

Is there a tech bubble?

Possibly, but Groupon and Living Social are not part of it. That’s because they are not like technology companies at all in terms of business model.

After all, Groupon is at its core a sales company that:

Hires lots of sales people

Gets sales people to contact small local businesses to offer step discounts and then asks for a large portion of sales

Uses a large portion of revenue to pay for sales people + online ad space

At the heart of it, other than posting discounts through an online medium, there is nothing really technology related about Groupon and Living Social. What do I mean by this? Most technology companies have an element of scalability.

Tech companies are valued at a premium because the cost of production per product sold reduces drastically. After you “finish” a product, the margins are high.

This feature is non-existent with Groupon and Living Social. Each portion of revenue requires a sales person. Repeat business is low. The companies will always need sales people which will always lead to low margins no matter how mature the company is. The same goes for the necessity of ad space purchasing to drive in consumers.

What Groupon and Living Social really are

So at the heart of things, Groupon is better described as a reseller of discounted products sold in bulk. During these transaction, the businesses at hand typically face a large loss per sale in exchange for publicity. Due to this, most transactions with customers are one off.

This is critical. Think logically about how sustainable this is. Does this model ever reach a point where it is radically more profitable on a margin basis? No. Do economies of scale exist? Not really.

Now think about this, what other technology companies could execute the same general concept but with a more scaleable platform? Unfortunately, pretty much everyone:

Google – Two commonly used portals with search and gmail. This large impression base can be used to indicate group discounts. Due to a lower necessity of sales people, the process of giving discounts can be done in an automated process which means better rates. Instead of paying 50% of sales to Groupon (which is already at a large reduced price), they can pay a smaller set percentage. Google maps is integrated on many smartphones. Google can have local discounts pop up on your phone theoretically on the fly as you are near locations with discounts. This is infinitely more useful for impulse purchases. This also offers better margins to both the client and to google itself.

Twitter – A large portal that is commonly visited. It is now integrated heavily into iOS which allows for the same local smartphone notification possibilities.

Facebook – The company that leads everyone else in online impression time, they can get the message for potential discounts out cheaply. It would be integrated. Given the creation of a platform for local buyers to easily offer discounts, Facebook could do what GroupOn does without any salespeople.

Yelp – people do reviews of businesses. People check these reviews. Imagine searching for restaurants and finding out one close to you has a large discount offered. Better model, less sales people needed.

Foursquare – people check in and get discounts. Now people have alerts around their geography showing discounts.

Every major new tech company that people think about can offer what Groupon offers, and in many cases with a better business model. That is a fundamental problem that can not be ignored. People keeping talking about small details, but they are ignoring the fundamental problem. Can Groupon be a decent business? Sure, but nothing to suggest the multiples it is currently valued at. It certainly shouldn’t be evaluated alongside technology companies that have scalability.