New Venture Lab: Equipping Christian Entrepreneurs

You've probably heard that Groupon is planning an IPO at an unheard of value of $15 billion and the company is barely three years old. You've probably also heard that there are now tons of Groupon "copy cats" that are "just like" Groupon. Entrepreneurs and venture capital investors can often be caught following the herd in cases like this, because the idea looks like a sure bet.

In my mind, the jury is still out on whether or not Groupon can continue to dominate social media coupon promotions and remain the category leader or whether "fast followers" come along that knock Groupon down a peg or two, which is what Zip Campaign aims to do. Based on my analysis, first-to-market companies like Groupon typically follow one of two paths, depending upon the nature of their business model.

• Defensible Domination: This group will have something about their business model that makes their first-to-market sprint grow in strength and become nearly unassailable for decades.
• • is such a company. They were the first-to-market online bookseller. They moved fast, quickly raised lots of capital, went public in order to amass a war chest, and they continued to invest in building their brand and extend their product lines. And they still continue to dominate today with no sign of weakness. What I see in Amazon is a scale-intensive business model that requires expertise in marketing and logistics. The bigger they grow, the more pricing power they exert on vendors such as book printers, publishers, manufacturers as well as other vendors such as UPS and FedEx. That additional pricing power means deeper discounts for customers, which virtually insures that they always have the best selection and the best pricing. This creates a virtuous cycle that is hard for a competitor to effectively or profitably compete against and creates a defensible dominate position just as Wal-Mart has done in the brick and mortar world of retail. It’s rather hard to imagine someone coming along and unseating either Amazon or Wal-Mart.
  • Caution: Not all that attempt this play are successful, especially if they have a flawed business model, even though it may have similar characteristics. Remember Webvan? They had a similar business model with an online grocery business, but they blew it by sinking too much into a highly-paid and arrogant executive team, an expensive acquisition of HomeGrocer, and lavish Greenfield infrastructure like robotic fulfillment warehouses, while Amazon was notoriously lean and mean in the early stages with a reputation for a no frills company culture. (Hear more about Webvan and their $1.2 billion mistake in our recent webinar, How To Think Like an Entrepreneur – Part 1.
• First to Market Flash in the Pan: This group, while also first-to-market -- and potentially a brand-name company -- lacks sufficient defensibility regarding their business model. Perhaps there are newer, better business models just around the corner, or a slicker, different way to provide similar results.
• • The earlier generation of search engines fit this category. The market cycled through a lot of search engines such as Excite, Alta Vista, and then seemed to have settled on as the undisputed leader. But then upstart came along with a better search algorithm, a cleaner, leaner interface, and the vision for superior revenue models. Search was not defensible in that every time someone performed a search, they simply opened a browser and could potentially go to a different search site each time. Nothing compelling about Yahoo tied users to the Yahoo experience. All web surfers had to do was to try Google once -- like we all did at no risk -- to find out it was better. After all, search was free, so scale and pricing discounts didn’t apply. Even though Google was by some counts the 17th search engine to arrive on the scene, they were still able to unseat Yahoo.
  • While Yahoo is still today trying to figure out who they are and what they do, Google has aggressively created innumerable products and services using a similar strategy of attempting to get the user to put more and more data into the Google cloud in exchange for cool, free services. Eventually Google reached a fairly defensible position themselves. The more data, email, photos, and documents you’ve committed to Google, the harder it is to leave them. They changed the equation enough as a fast follower (after studying earlier search engines) that they were able to create a better mouse trap. And of course they've ended up being much more than just a search engine. While Yahoo was a First-to-Market Flash in the Pan, Google has moved into the realm of the Defensible Dominate.

It seems to me that Groupon falls into the latter category of a First-to-Market Flash in the Pan. Even though I love their story and their early success (as I've referenced in webinars, their service is "easy to try, easy to buy, easy to leave, and fun to refer'), I see very little that is actually defensible about entering an email address in order to get a coupon on the consumer side.

And, for small businesses on the other side, pricing their typical product or service at a 50% discount and then giving Groupon half of the remainder, leaves them in a loss-leader position. That kind of promotion only works if they are gaining a recurring customer and their customer acquisition cost can be amortized over a longer customer life. But many of their deals are spas, shows, restaurants, etc. that are anything but a recurring customer relationship. Instead, they are more of a one-time experience where a low-priced deal only attracts the bottom feeders and bargain hunters. Add to that the business operational issues of bulk discounts that lead to sales spikes, staffing shortages, and customer service failures, such as a small restaurant might experience when 100 customers all clutching Groupons rush them on Friday night. That leads to many dissatisfied business clients and study results like this one that found 40% of those that tried promoting with Groupon would not do it again. Small businesses need steady, incremental group, not huge spikes.

I further believe that Groupon will experience severe price erosion in a race to the bottom. Let’s face it, selling a promotion and writing a promotional email is hardly worth half of the revenue for the product or service. I think Groupon and all of their copy cats will see pricing continue to be pushed lower and lower in response to competition and customer pressure and finally, pricing is likely to move from a significant percentage of their client's revenue to a flat fee per campaign like many services are priced. After all, Groupon's cost of writing an email and sending it is not any higher when it promotes a $1,000 weekend getaway than when it promotes a $50 meal for two at a restaurant, so why do they deserve $500 for one and only $25 for the other?

But I think the real threat to Groupon’s business will not come from copy cat competition or price pressure, but rather from fast followers that study the Groupon business model, look beyond it to what is likely to happen next, and build a business for that coming future. While Groupon has done a very good job of evangelizing the idea of social media marketing, once a small business figures that out, they can just do it themselves and distribute their deals through the numerous coupon aggregators, Google, and Facebook directly. Groupon and their kind have just been rendered much less relevant for the do-it-yourselfers.  Some businesses will still want to pay for the work, while others will want to do it themselves and the market will have choice.  It is just a matter of time. That is how free markets work: advantages always get "competed" away.

And that is exactly what Zip Campaign (now out of stealth mode, but still in beta) aims to build: a do-it-yourself coupon promotion application for Facebook whereby small businesses can create all their own campaigns for a flat monthly licensing fee starting at only $79 per month. And, they can promote as deeply and/or as often as needed to maintain a steady flow of customers and growth. That's what will really kill the current category of flash in the pan coupon promoters. It's the next iteration, the next twist on a good initial idea. Once the market knows how to do it, they will just do it themselves and Groupon can join the ranks of travel agents and other intermediaries that were disintermediated by an informed customer with access to the same information and know-how.

This is how Zip Campaign's explains their service:

 

Disclaimer: Zip Campaign was co-founded by  and New Venture Lab. Grant is a New Venture Lab member and  alum and the idea was partly germinated with Grant at my Tennessee farm (so I am a bit biased).

Note: Stay tuned for an upcoming guest blog post series by Grant that details his launch experience thus far with his new company.