Why Groupon is Overvalued

I was talking to a VC the other day about Groupon. According to him, every local business he's talked to that's used Groupon has universally had a bad experience with it. Groupon customers rarely turn into repeat customers, which is the main incentive for a business to use Groupon. This shouldn't be too surprising given that most Groupon customers are probably very price sensitive and in deal hunting mode.

&#62; As a result, people are more often looking for, and more socially comfortable using, coupons.<p>I think the coupon argument is a red herring. The way I see it, there are two types of coupons: the price discrimination variety and the early-adopter-advantage variety. The former category includes things like grocery flyers and has a certain stigma associated with it -- which is why it works (if everyone clipped grocery coupons, the store would be making less money, not more). The latter category is where Groupon fits in, and I don't think it has the same stigma as the former, nor do I think the recession will affect it as much.<p>Flashing your iPhone to save 60% on surfing lessons sends different social-status signals than clipping newspaper coupons to save 25 cents on canned soup.

Without the real financials at hand, it's hard to tell if they are overvalued or not. There are numbers being thrown everywhere... but I'd take them with a grain of salt unless backed by hard evidence (which is lacking).<p>Overvalued or not, everybody knows Groupon is working. Customers are crazy about it. My wife checks it as the first thing in the morning. And there's no sign of businesses giving up on offering deals.<p>As for the businesses who don't like it, if they are looking at making profit from the one-shot Groupon traffic, I think they are wrong. Think of what you spent on Groupon as part of your advertising expenditure. Using Groupon, you are putting your name out there in BIG'N'BOLD along with an opportunity to show them how awesome you are.

I would think the biggest issue with Groupon is the type of customer they send to your business. Is the Groupon demographic likely to produce valuable long term customers? I am skeptical, because the trait being selected is price sensitivity.

An article in Inc recently quotes a couple businesses that only ended up breaking even on their Groupon coupon. So the businesses are just hoping people come back for more with is less than guaranteed.

I think it has to be said that a successful business does not have to be a unique business. This is about how they don't have exclusive deals, who said they did?

Price is where supply meets demand. Not a comment just a reminder.