Magazine article Marketing

Andrew Walmsley on Digital: Group Theory Adds Up

Magazine article Marketing

Andrew Walmsley on Digital: Group Theory Adds Up

Article excerpt

There is value in the positive cash-flow model, as the revival in 'buying clubs', led by Groupon, shows.

In the heat of the dotcom boom, group buying was all the rage, Mobshop, Priceline and Mercata battled for a share of consumers' wallets, taking an old concept, buying clubs, and bringing to them the scaling, speed and frictionless communication of the internet.

It should have been a slam-dunk, but by the early 2000s these companies had largely deserted the consumer space, moving into b2b, technology or bankruptcy.

The web audience had not reached the scale needed to give critical mass to group buying and, for consumers, ecommerce was still unfamiliar territory; far from everyday.

Flash-forward to 2011, and group buying is back with a vengeance.

Groupon, perhaps the best-known company in this space, after spurning a dollars 6bn buyout offer from Google, has just raised dollars 950m (pounds 610m) from a range of well-known growth and venture capital funds. Back in April, it raised dollars 135m on a dollars 1.2bn valuation, now it's valued at a reported dollars 4.7bn.

So why is Groupon worth four times what it was just eight months ago? Is another bubble about to hit the dotcom sphere? And why did it turn down a higher valuation from Google?

The growth of this business is staggering. It's now in 500 markets in 35 countries, sending daily emails to 50m subscribers and attracting a reported pounds 2bn in revenues on a roughly 50% gross margin. It's profitable, the market leader and already a scale business. Forbes magazine called it 'the fastest-growing company ever'.

Surely there are only so many tooth-whitening treatments and fish pedicures a girl can get? On its own, this growth isn't enough to justify the massive valuation, and certainly not to explain why it turned Google down. There are some much better reasons.

First, Groupon has no working-capital requirement. It pays merchants after it is paid by consumers, meaning no money is tied up in stock. With positive cash flow like this, customers are funding its growth; investment is used to accelerate this, acquiring similar businesses in other territories and expanding its sales force.

Second, it is the market leader. Most people don't want their mailbox packed with offers every day, but a couple is fine, even fun. Being market leader makes you the default sign-up for a virtuous circle of consumers and merchants; and group buying is an inherently scale business - the bigger you are, the more clout you have.

Third, it has lots of customers: 58,000 merchants have already done deals through Groupon, accelerating as the local sales force grows. …

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