Joseph Essas, the blog…

In the last couple of years, we saw an explosion of Daily Deals type of sites and services – Groupon, LivingSocial, Yelp, Facebook and many other joining the trend. In essence they all play on the variant of: you get daily email with deeply discounted coupon, you pressured by fast expiring date, and the coupon is only activated with minimum threshold of participants, which encourages you to spread it around. Coupons are very local, and hyper targeted.

As many more companies jumping on this band wagon, and demanding huge valuations as as result – it seems appropriate to take a look on what this model really is – and how can every business benefit from it.

If you look closer – Groupon innovated with a brilliant twist on an age old direct marketing model. Here are critical components of Groupon business model.

(1) deep discount
(2) expiration date
(3) consistent design and targeting
(4) minimum participant threshold – hence social virality
(5) transacting through the platform
(6) thousands of local salesmen – feet on the ground

5 and 6 are real breakthrough in my mind. Transacting through the platform – is the key differentiator between Groupon and just your plain old email spam marketer. What is the difference between a sophisticated email spammer and Groupon? You get email offers from both, they both are targeted, both require click-through to transact. The difference is that Groupon actually captures the transaction, which makes is immediately useful to small local business, and with number 6 (feet on the ground) they are able to upsell the model to every business, regardless of their technical sophistication.

Email spammer as a contrast – only deals with able online businesses, takes a risk on CPA deals, since there is an unknown of a business to convert a customer, due to poor ability or poor transactional platform, and ultimately does not capture the full revenue but only small fee on a CPM/CPC/CPA basis.

I’m not going to discuss here – if the model is good or bad for local businesses. What is really interesting to me, is how ability to capture the full transaction – literally transforms a business from $100mm business to $20B business.

Groupon prides itself on 150mm subscribers. Those are not really subscribers – they are just email lists. Subscribers in more traditional definition, are the ones who actually pay a regular fee to particpate in the service. Here we are dealing with “opt-in” email customers. Every only direct marketer has 100s of millions of those emails.

So key is really all the points above. Capturing the phycological effect of expiring deep discount, with social virality and transacting the full value through your platform makes it unique and very interesting.

In fact many businesses started to use a similar model – Gilt Groupe for example, uses deep discounts, club exclusivity, expiration date, and again full transaction as their model.

In Groupons case – huge barrier to entry is not the millions of “subscribers” but actually feet on the ground. This is very hard to replicate at scale effectively – and they get a big credit for it.

As we continue to innovate in online world – it’s worth to keep in mind those critical components of success of those recent business models:

– consistency of user experience
– ability to capture full transaction value
– big list of “opt-in” users
– social virality – put your users to work to get the benefit