Update: Matt of Yelo.us, a local search marketing firm in NY, notes in his comments below that Google is already actively marketing this product in NY. He points to the Offers landing page where the program is described very briefly and there is a contact form to participate in the beta programs for Google Offers. On the page Google notes: Google Offers makes it easy for you to attract new customers and bring back old ones by enabling you to instantly post discounts and other types of special offers across Google properties.

Google has confirmed a Mashable report that they are testing a Groupon like product. Greg is also reporting on this at SEL.

Google’s statment:

Google is communicating with small businesses to enlist their support and  participation in a test of a pre-paid offers/vouchers program. This  initiative is part of an ongoing effort at Google to make new products, such as the recent Offer Ads beta, that connect businesses with  customers in new ways. We do not have more details to share at this time, but will keep you posted.

Mashable is reporting that “that Google will pay out 80% of a business’ revenue share three days after its deal runs. Google will hold the remaining 20% for 60 days to cover refunds before sending the rest” and that it will be powered by Google Checkout.

Google renamed their coupon product to Offers on November 15th, just a mere two weeks prior to their discussions with Groupon becoming public. The purchase of Groupon made sense to me at the time and the development of a deal product now does as well.

Here is a slightly revised chart from that time frame of Google’s free and paid products for Local that shows how a Groupon like Offers product would fit in the mix…
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The development of an automated or semi automated deal product at level 3 in the chart above is a no brainer for Google. Developing a deal product for national brands is also within their current institutional knowledge. Where they could very well have trouble is the “feet on the street” in the local markets. And that will be the true test of their ability to compete in the space.

As I noted in early December, unlike Tags and Boost that had restrained upper limits on income, a Deal product could have a virtually unlimited upside for Google if adopted nationally. The market, while starting to get crowded, has two market leaders and there is certainly room at the moment for a third. Whether they will successfully execute and be able to achieve a market leading position is ultimately the question.