Local deals’ leader Groupon is currently valued at $15 to $20 billion for an estimated $1 billion 12 month revenue and LivingSocial at nearly $3 billion for half that. A lot of people are raising the issue of whether Groupon’s valuation is justified.
Firstly, it’s unclear what could prevent the many competitors from chipping away at Groupon’s first entrant’s lead. Next to LivingSocial, there are more than 500 competitors in the US alone, not least Google itself with Google Offers. Groupon is well-established in North America and in major cities around the world. It still leaves plenty of room for more local competitors, for example in smaller cities.
Groupon’s main IP assets are claimed to be 1) its superior analytics to match user profiles to deals, 2) great email marketing, and 3) an “industrialized” sales process. It sounds good, but not really like something that a Google or an Amazon could not replicate.
The most important question is whether Groupon really create merchant and customer loyalty. Groupon claims on its Web site that 97% of its merchants come back for more. I’ve been told that Groupon users are quite addicted to it. However, the main motivation of merchants and customers still seems to be Groupon’s lead in numbers of deals and numbers of customers. There does not seem to be any other major customer lock-in, not major switching costs that would prevent merchants and users to lessen their engagement with Groupon. Groupon seems to be maintaining its lead by spending the $1.15 billion it raised on sales and advertising, i.e. by burning cash rather than creating sustainable merchant and customer loyalty.
According to Compete, LivingSocial’s (main?) Web site had 60% fewer online visitors than Groupon’s in March 2011. But LivingSocial’s has a much larger number of active Facebook followers (3 million or three times more in March 2011) — which could bring more sustainable customer stickiness. LivingSocial already enjoys a 25% higher satisfaction rating on FaceBook.