There Is A Trend To Spot In Groupon’s Growth Rate

What is different between Groupon and all the rest of the massive Internet sites that have been in the news lately? Why have they become one of the fastest-growing companies ever?

For the purpose of this discussion, set aside the fact that they are also massively unprofitable, a reality that they will get beaten up for in the upcoming IPO. It doesn’t change the evidence that the company’s revenue growth is phenomenal.

The simple answer is their business model. To recap, they offer a discounted daily deal if a group of people buy the “groupon.” Then, they take, as compensation, a percentage of the revenues from the merchant whose deal has just been sold. Simply put, they are offering a massive channel and effective customer acquisition strategy for merchants, small and large, and for that, they charge a hefty channel fee.

To me, this is simply brilliant. It is at a level that otherwise brilliant players like Facebook, LinkedIn, Twitter, Demand Media, The Huffington Post, TechCrunch, and so on have all missed. Over the past few days, I have written extensively on a trend that stares me in the eye: Groupon Leads Adoption Of Revenue-Sharing Monetization Model, Under-Monetized Facebook Dominates Display Ad Market, LinkedIn IPO Is A Success, But Monetization Rate Is Far Too Low, and Demand Media Also Under Monetized.

Whatever happens to Groupon in the IPO market, it has shown us something important: merchants are willing to pay heavy channel fees to acquire customers, and this truth, if used well, may represent far better business models for tomorrow’s Internet giants than the measly CPM advertising.

If you follow this logic further, let us ask:

• Should Glam Media start using their reach to actually sell clothes, instead of just brand advertising for clothes?
• Facebook is already the largest player in display advertising. But shouldn’t a portion of the advertising inventory be deployed on earning sales commissions for various products and services?
• Twitter has tremendous data on what brands are being Tweeted about. Why not explore an affiliate advertising model to link some of those Tweets up to actual transactions?
• And TechCrunch? Why not “sell” some of the products they have positive feelings about and tend to talk up?

The list could go on and on.

A major question emerges if the media industry – reeling from a business model meltdown – adopts revenue sharing as the raft that saves it from the flood. What about objective journalism? What about conflicts of interest and the role of journalism as a watchdog? What about carefully researched opinion?

These are complex questions, no doubt. A solution to journalism’s existential crisis versus a fair and nonconflicted existence. The question has arisen before as the media industry adopted advertising as its main sustenance. Why is this current question all that different?

It isn’t.

These are exciting times. John Doerr’s words, written in The Internet Is Underhyped, ring true. I think through the commercial potential of Groupon is drawing our attention to this.

Some have gone so far as to say that Groupon is a Ponzi scheme. It isn’t. Groupon is going to have to adjust its revenue sharing model and reduce the percentage it charges. But the fact remains that revenue sharing is a powerful model for performance marketing, and it is here to stay.

Please chime in with your thoughts and analysis. For further reading you can refer to some excellent pieces by Steve Cheney and Don Dodge.