Underpaid or Overrated

Posted by Ben Wilkinson on December 1st, 2010 at 3:31 am

It was reported earlier today that Google will be buying group buying site Groupon for a reported $6 Billion (yes, that's billion with a capital B). Call me crazy, but I think they may have overpaid for the two year old start-up.

Groupon is an interesting business that allows retailers of all types to acquire customers by offering deals of up to 50% off. What's more interesting though is they allow local mom and pop shops to gain customers by offering deals to people in their neighborhood.

Below are a few reasons why I think this was a bad deal for Google:

Barriers to Entry

Let's face it, in the last six months EVERYBODY has gotten into the localized deal game. Even in my old hometown of Salt Lake City, Utah, I get the deal of the day from each one of the media outlets there. I think it's safe to say that the localized deal syndication game has jumped the shark if newspapers are trying it

Market Fragmentation

The deals that have been offered from Groupon vary on a daily basis. One day you could wake up to a deal from the Gap, the next day, you're getting 50% off a four-hand massage at your local massage parlor. While Google has proven it's very capable of dealing with mass advertisers (i.e. AdWords) it will be very confusing to the customer as to what type of deal to expect on a daily basis.

Value Dilution

I think this part is the riskiest to Google. It's great that the Gap wants to give everybody 50% off their next pair of jeans (after all, the Gap's margins allow this type of discounting) however, Vito's Neighborhood Deli doesn't have the same margin that the Gap has and runs a huge risk discounting it's prices 10%, let alone 50%.

All of that said, if anybody's going to make this successful, it will be Google. Google definitely has the manpower and the reach to be successful with advertisers and merchants of all sizes. Likewise, the last time people called Google crazy on an acquisition (YouTube), it proved those people wrong.

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