Groupon Valued at $1.35 Billion? New Features May Explain Why

Social shopping site Groupon is a startup that owes its impressive rise to the social media revolution. It offers deals (discounts on restaurants, services, etc.) that are only "triggered" once enough people buy in, which gives users the incentive to share the deal with friends and family. The site has rapidly expanded its offerings into 52 U.S. cities and attracted a raft of clones. Now, Groupon is looking to grab even more cash from its burgeoning user base.

The Chicago-based startup -- if you can call a company with a $1.35 billion valuation that -- has just launched a rewards system designed to keep social shoppers returning for freebies and tap the frequent-flier mania that drives some irrational users to fly around the world on a cheap fare to maintain their Gold Flier status. More importantly and more quietly, Groupon is now allowing subscribers to designate their neighborhood, a data grab that clearly presages a move into hyperlocal group-purchase offers. This completely changes the game and makes Groupon's valuation a lot more understandable.

Almost the Perfect Online Business Model

Here's a little Groupon math to understand better why the company has such an enormous valuation based on relatively piddly annual revenues. For starters, this is perhaps the closest thing yet to a perfect online business model. Groupon holds no inventory, risks virtually no capital and counts as its primary expenditures technology to maintain the website and email updates, plus sales people to beat the bushes for merchants (which apparently is going so well the site has a multi-month backlog of businesses wanting to go Groupon).

Groupon takes a whopping 50% cut of the gross sales resulting from each offer. Then, it subtracts transaction and processing fees from the merchant's take. Granted these offerings are coming at a reduced price so Groupon's take is not rack rate. (This also explains why businesses are wary of training customers to accept Groupon discounts as the norm since it seems impossible that these primarily small businesses can make a profit on such a meager take). Translation? Groupon is basically a cash machine constrained only by its "one-offer-per-market-per-day" mantra. (Two if you count the side deal).

By going hyperlocal, Groupon wil be able to expand the number of offerings it can put out there exponentially by tailoring pitches specifically to residents of a particular zip code or borough or town. Such targeting will dramatically improve results for merchants because they'll likely be getting customers who live near them and could be repeat buyers.

One potential downside risk, however, is that the customer "breakage" -- those who pay for the deal but fail to use the service -- might decrease when the deal is in the 'hood. (Incidentally, I've never seen Groupon's breakage rate anywhere -- it would be a good number to have). Further segmentation could take Groupon into verticals such as food, adventure, travel and others.

Other Social Buying Efforts

If nothing else, Groupon is a testament to solid execution. Electronics deal-a-day site Woot has been around far longer, and it hasn't achieved this sort of traction. Earlier efforts at social buying groups failed, likely because, in part, social media wasn't as ubiquitous back then and sharing couldn't play as enhanced a role previously.

Now, Groupon is revving the engines and expanding its social tentacles into the communities it covers and, perhaps, changing America's shopping mindset. For more detail on Grouponomics, here's an excellent business breakdown.