Why Groupon Makes Sense (to Google)

David Mihm has an excellent piece (that I happen to agree with) on why Groupon in a broad sense is synergistic for Google. I think coupons and the new twist that Groupon brings to them will be a successful  and profitable advertising medium. John Battelle thinks it worth significantly more than $2.5 billion. Greg Sterling though argues that it isn’t worth $5 billion and that very well could be true. But Google may be the only company for which the purchase makes sense at these levels.

I would like to add the following thoughts to the discussion. Greg has estimated  to me that only 25% of all SMBs will ever be willing to participate in self serve internet advertising. The leaves the vast majority of local businesses not participating in and unaffected by most of what Google offers (Tags, Boost, Adwords) today.

I have estimated that Boost with a 10% adoption rate and an average $100/mo spend would generate $500 million a year in income. If it approached the 25% cap it would reach $1.2 billion with current adoption levels of 2 million claimed businesses. I have estimated that Tags, at a fixed spend of $25/mo and the same 10% has a much more limited short term potential of  $60 million. Even as claimed listings grow, there is a very real top side expectation for both products in a self serve world.

Enter Groupon. It is a product that is already generating $500,000,000 in annual income. If Google did nothing else but add the revenue stream to Tags and Boost when it rolls out nationally, they would be at a $1 billion dollar in local ad revenue.

But Groupon also has staff on the ground trained in selling new media. The portfolio for these sales people would immediately increase with a buyout. And an impressive portfolio it would be. These folks could lead with a Groupon deal and then lock in a monthly recurring revenue source with Boost or Adwords. If their selling efforts for Groupon were a bust initially, they could still start folks with Tags and demonstrate the significant benefits of local internet advertising and of claiming their listing in Places and move on to Boost and Groupon down the road.

This purchase would not just give Google a successful, easy to explain coupon product for SMBs (and national players to add to the Adwords revenue stream) but it would give them an on the ground sales force with an actual foot in the door of the other 75% of businesses that would never self serve. It is conceivable to me that just by adding these products to the portfolio and pitching them in person Tags and Boost sales would skyrocket immediately.

Google would have in place Free (Places, Offers), Good (Tags, Tagged Offers), Better (Boost, *?) and Best (Adwords, Groupon) product offerings in both a self serve and full service model that could scale from the single shop to the national retail chain, nationally and internationally. It would cover 100% of the opportunity, have huge upside potential and start out of the gate with a roughly $1 billion highly profitable, income stream and a defensible position …

Investors may not like the economics and analyzed singly Groupon might not in fact make sense. But if Google could use the purchase to jumpstart and grow Boost, Tags and Adwords for local in the rest of the world, the potential of Groupon to them at least, is big.

Here is a chart of Google’s free and paid products for Local that shows how Groupon would fit in the mix…

Type Location Ad Coupon
Free Places Offers
Good Tags Tagged Offers
Better Boost *?
Best Adwords Groupon

*? one possible area of Groupon expansion for google would be downstream to an automated group coupon product that would work in those areas that Google doesn’t have a sales force. This would play to Google’s automation strengths and further leverage Groupon across broader markets.

Please consider leaving a comment as your input will help me (& everyone else) better understand and learn about local.
Why Groupon Makes Sense (to Google) by

21 thoughts on “Why Groupon Makes Sense (to Google)”

  1. Great analysis Mike. I can attest to the power of a direct sales force working with SMBs – its expensive, messy and hard to scale but it works.

    However, a funny thing happens when you start talking to the people that are paying the bills – they want answers to all of the problems they have with your brand. They don’t want to be mis-treated or they will stop paying.

    Once there is a real human who calls on a SMB and says “Hi I’m from Google” (and after the initial shock at talking to the man-behind-the-curtain), the conversation will not be limited to what ever narrow product the sales person wants to sell. Instead, all of the issues you report so well are going to be topics of discussion long before the sales person gets to the “close”. Who knows, it may improve “customer service” at Google??

  2. I agree with Ted, above. When selling a tech oriented product the sales people are going to be questioned about customer service issues and will need to get issues resolved to get trust. That occurs all the time.

    OTOH; I think you have a great point, Mike: A feet on the street sales force can push a lot of products. My experience with Groupon sales people in a couple of markets were that they weren’t necessarily great sales people…but they had the hot product that sold well. So if google buys they have to spend a lot of money to create great sales people.

    But then google has a lot of money.

    Who knows? Its not my problem……but I’ll say this…..If groupon sells for that big number…..I hope everyone that works there has some stock.

    That would be sweet!!! :D

  3. @Ted & Earl

    I agree with your comments about the need for Google to “answer” for their service issues. The reality that we are now seeing with Tags is that when you have a Tag and a problem (say a merged listing) there is actually a human you can call. One that even offers to call back with an update. I think Google understands that requirement.

    This is why Groupon makes sense even if not a great fit, they are a service focused company and one assumes would be allowed to run on their own until Google gets the rest of their local service house in order.

    @Earl
    Training and pay are always issues with local sales folks… but when you have margin like Groupon and Adwords you can afford to train and pay.

  4. Great analysis, Mike.
    The Google sales feet-on-the-street sounds like a good deal for SMBs, assuming the sales reps are willing to solve problems, or at least answer questions which is more than SMBs have gotten from Google in the past. But wait, isn’t this what online marketing agencies (like mine, gulp) have been doing for Google for years now? Google has never really treated agencies like a valued selling partner; while they have offered limited agency support, they mostly expect us to just go it alone. Now it sounds like they may commit the classic no-no of competing with their primary sales channel. Watch out, SEM agencies!

  5. @Cindy

    Google suffers agencies but doesn’t embrace them. Think Apple dealer and Apple Store… but initially at least they would be taking money from the larger agencies and not the boutique SEM shops…. But it should remind even boutique shops that they need to be unique and offer real value as well.

  6. WOW – $500 million a year already! That’s pretty amazing for a company that launched two years ago last month! Sound like this could be a really good purchase for Google, if the numbers work out.

  7. It’s an interesting discussion-as someone who is both a small business and has run a Groupon, I wonder how many business owners they’ve spoken with. The model is far from perfect but can bring in some quick business, especially if you’re a restaurant! Without violating the privacy agreements which are part of every contract, let’s just say that some things are easier said than done.

  8. @Mark

    Thanks for your comments. Would love to hear more (obviously within the constraints of any agreements)…. are you a restaurant? did it work for you?

  9. Hi Mike,

    Is Places only now the bottom tier if you get a human response when you have a Tag? How much are Tags and what is the actual return compared to a Places only listing or say Yellow Pages YELL.COM(UK)?

    Cheers. Andrew.

  10. Hi Mike,

    Would buying a Tag allow you to have more than one business linked to a phone no? Is that why google are cracking down on multiple-listings and business model conformity?

    Cheers. Andrew.

  11. Hi Mike,

    Co-incidentally I happened on Groupon a few days ago and its mainly eating offers so far. Hardly a broad offering. Not worth 5 billion.

    I could make Places a good income stream with a bit of proper IT work.

    Cheers. Andrew.

  12. And finally Groupon has rejected the potential $6 billion offer from Google! It will be very interesting to see how Groupon will evolve from here. Will it succeed or fail? I’ll keeping watch on that.

    -Divyang

  13. I think that Groupon relies heavily on Google for promoting their Groupons. It wouldn’t surprise me if they were at or close to being Google’s biggest single advertiser.

    The deal wasn’t done at the moment mainly due to anti-trust issues, and the likelihood that in the event the deal didn’t get approved or completed, then Google would have to pay a pretty hefty sum to Groupon for not completing and it is more likely Google pulled away until they were free of other messy anti-trust cases they have going on at the moment.

    I think Groupon also still have some runway in terms of expansion. Even though they only do a deal a day per location, once they have a small self-service model as well and you can keep doing a deeper dive before you max out in terms of locations.

    I’ve been very impressed with Andrew Mason the CEO of Groupon. He’s quirky and smart.

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