Why Groupon Will Beat the Group-Buying Clones

Many pundits lately have decried the Groupon model as easy to emulate. They've also said that Groupon doesn't really grow customer loyalty for the businesses that use it, and that fierce competition with other deal sites would result in price wars and a race to the bottom in terms of commissions. Merchants were also getting more savvy about how they used group-buying sites.

I was one of the pundits who believed these things. I don't anymore. In fact, now I'm fairly sure Groupon and a handful of other bigger players will be increasingly difficult to beat or catch, and they may now have developed a sustainable barrier to entry for new competitors. That could be driving the latest rumors that Groupon will actually get a $2 billion to $3 billion valuation in its next funding round.

Here's why I changed my mind. I've spoken to a few restaurateurs around San Francisco, and they're sick of getting pitched by deal sites. So sick, in fact, that many of them have hung up the phone on sales pitches from group deal sites. Restaurants are the most prized offerings for group-buying, and they tend to elicit the most regular response, which makes them, in effect, the canary in the group-buying coal mine. These folks told me they are now seeking two things: first, a rough guarantee that a deal they agree to will drive decent traffic; second, the ability to meter the traffic and put a ceiling on the number of offers sold. No more nasty surprises, thank you very much, they say.

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That second point is no problem for any new startup daily-deal site to handle, but the first one can be quite difficult. So, if restaurants are finding that signing up with a new deal site is too much of a hassle, and if they want performance guarantees that only the established players can provide, then you have a built-in barrier to entry that is somewhat sustainable. Additionally, Groupon and LivingSocial have essentially bought out advertising inventory and keywords for large swathes of the online universe, making new customer acquisition via advertising very spendy: It's now much harder and much more expensive for yet another group buying site to build a decent email list.

Getting customers to sign up for yet another group buying site is hard in the same way that getting customers to sign up for yet another email newsletter is. At some point, who needs it? And without a decent initial subscriber list, it's difficult to get high-quality deals. In other words, you've got something of a group-buying deal lockout emerging, with top players looking like they will control a large share of the market.

Some niche sites will find traction by gaining subscribers interested in more targeted deals and avoiding the noise. Aggregators like Yipit.com and 8Coupons.com will level the playing field somewhat and make group buying more like regular online coupon clipping. But in the meantime, the next time someone says that anyone can start a Groupon clone, ask them to nail down 10 restaurant deals with no subscriber list, and then come talk to you.