Crowd buying startup, Groupon is prepping for a Spring 2010 IPO at a valuation of $15 billion. This formidable valuation screams bubble to me, but there a few reasons I believe Groupon has a flawed business model.
1. Easy to duplicate business
Living Social, Townhog and hundreds of others worldwide will continue to nip at the heels of Groupon. LivingSocial, at the time of this posting has sold over $20 million worth of Amazon Gift cards in 12 hours. This easily beats Groupon’s former high note of $11 million in Gap gift cards. The competition in the nascent social commerce landscape will only continue to heat up.
2. Products do not match audience needs
A big majority of the Groupon offers are simply not compelling to the masses. After a year of daily emails about spas and sub-par restaurants, I removed myself from the Groupon mailing list. The first player in the social shopping space to institute smart opt-in, filtering and category tools will have an advantage.
3. Groupon has little regard for SMB’s bottom line
This is not a win-win business for all. Groupon takes about 50% of any product or service sold through them — this is on top of the huge discounts offered to the consumer. Add the 1.7% for credit card processing and you will erode your margin by over 100%. That of course has meant 1 billion in revenue for Groupon, while many small businesses are losing money on each transaction. A social commerce rival that values the needs of SMBs will threaten Groupon’s rein.