Jeff – I commend your stance as one of the few to do critical analysis of Groupon given the media love surrounding the venture. But I think you might be selling short the fundamental business model at play. Yes, Groupon does *now* utilize direct mail marketing, but the acquisition method doesn’t define the business. Groupon is successful because it makes transactions more efficient between buyers and sellers – it helps them reach BATNA much more quickly through demand aggregation (this is working well for LivingSocial too). There’s value in doing that and they are capturing it. It’s a simple, yet classic market-maker business model that has proven successful for Google, (as you cite) Amazon and even Netflix. They differ from Google and the rest by effecting many-to-one transactions. Given their brand and business success to date, Groupon can probably easily utilize other mediums (Facebook & Twitter distribution channel integration) for acquiring users and providing their same fundamental core value proposition. With the amount of funding received to date, you can be sure that the public is not seeing all the stats that are driving user retention, revenue model sustainability and future growth. It’s tough to extrapolate a definitive picture using direct email marketing history as a proxy for future performance, but I think you did a great job of calling that metric out and seeing what it might say. Thanks for the analysis!

Jeff,I agree with your stance that conversion rates for GroupOn deals will wane much the same way as it has for other forms of direct marketing. What I think the most revolutionary aspect of GroupOn is its ability to become hyper-local and partner cost-effectively with local neighborhood establishments. I recently bought a GroupOn for a local South Boston Mexican restaurant and was delighted to save $25 on what would have been a full-priced meal. No company before has been able to bring that type of a geo-targeted, relevant deal to my doorstep before. That to me is the sparkle in the GroupOn model. That is what keeps me coming back and checking GroupOn to see what local establishment wants to fight for my consumer dollars on that day.

It is great to see that someone besides me looks at experiences from past direct marketing innovations to provide a pragmatic view of future success. The pattern is the same regardless of how far back you look. Even though it is hard to imagine, telemarketing and direct mail were once new technologies and were extremely successful when they were first introduced. The lesson here is that when something is new and exciting and show amazing growth, some people (those who have forgotten the past) tend to get caught up in the excitement and extrapolate existing growth and margins indefinitely into the future. The result is inflated valuations until the first sign of slow down.While I do believe that Groupon's growth will slow due to coupon fatigue, information overload and competition – I see that its business model / value proposition is fundamentally sound. So I think they will continue to succeed as long as they manage growth and expenses.

I was a very early adopter of Groupon and yes, got caught up in the excitement of getting a good deal. You still had to hold your breath to see if the deal was going to tip or not. Now, not so much. Personally, I'd rather stick with the merchants I already patronize. Yes, the deal are nice, but the customer service when you've had to announce you have a Groupon coupon can leave a lot to be desired. On the flip side, many of the merchants have been overwhelmed because they didn't limit the deal, they lost regular customers who felt squeezed out, and coupon holders were rude, even getting physical (and that was at a nail salon in Hayes Valley, San Francsico!). They were also not prepared to take full advantage of the opportunity to convert these new customers into repeat customers with some kind of follow-up offer and/or did not capture contact information to follow up.All in all, not the ideal situation on either side of the transactions.I think there will be a certain fatigue that sets in. Both merchants and customers will become more discerning. A bargain isn't a bargain if you don't need it or the true cost is more than you want to pay.When Groupon turned down the $6B deal, it had me thinking “Friendster.”

This is exactly why it will fail over time if it does not evolve it's model.You are just looking for a discount and have no loyalty to the discounter which fails as a method of gaining new customers unless one is in the business of discounting.Desperate business overlook the fundamentals of promoting themselves and fall for schemes like this that do nothing to generate real and repeat customers. How much did that helicopter guy actually make by way of profit on those 2500 flights and how many will ever come back and pay full price?

Jeff, agree and want to add. Have you tried to use the service? I have had several local merchants sign up as a test to see how it actually works. The results so far are both depressing and pose several questions. All have not even received a single email (besides the initial auto responder) from the company regarding their offer; where or how it sits in the queue. None of the offers have been accepted or made it into the daily email. This may seem on the surface a classic problem driven from over demand, but I see it as a classic services scaling issue. One that has killed many a solid company. I read they are furiously trying to hire hundreds of “sales agents” to handle the request. Additionally, I know they are working on a self service module, but in the classic DM model, that doesn't scale very well. It raises your click through cost. Combine that with what you brought up on the rate side and you have compressed margins, not a good thing for an expanding company. Professionally, I would have taken the money. Unfortunately I fear Groupon might be the classic company that figures out the hard way.

Groupon's CTA model using email and social campaigns is another reason to be depressed. As small businesses feel the sting that comes with customer-perceived devaluation of their products or services (perils of deep discounts), more of them could eschew Groupon's excessive cut. A 50% CTA commission on top of a half-off deal is a significant risk for any business if not handled intelligently… using upselling, relationship building, follow up marketing… and we've seen some places close their doors because of it. With other couponing models, such as the Entertainment Book, the deep 50% discount at least comes with no revenue sharing. The coupons are printed for free, so a restaurant has a chance to keep the loss leader to around 35% food cost. That's cheaper than most forms of advertising. But a Groupon discount, for most restaurants presents significant risk of the meal generating a loss. Unless they convert that person to a second visit, they're not helping themselves using Groupon. I don't expect most customers to be sympathetic to the business (wish they would be). Hopefully, as more businesses rebuff the extremely unfair deal that Groupon offers to the business owner and decide to run their own discounts through social channels, Groupon will reform their model and allow for a more reasonable split, closer to 10-15%.

[...] this is indeed the case, and it’s apparently been the case for just about every direct marketing operation since, like door-to-door vacuum salesmen, Groupon will need a second act. There’s evidence in [...]