(Editor’s note: Jeff Bussgang is a General Partner at Flybridge Capital Partners. This column originally appeared on his blog Seeing Both Sides.)
You probably read a lot last year about Groupon’s rejection of a supposed $6 billion offer from Google. Most of the reports breathlessly described the explosive revenue and customer growth the company has achieved in two short years and what a breakthrough the model.
With over 40 million email subscribers, Groupon’s success is based on consumers responding to their daily deal emails, and sourcing high-quality offers that compel readers to respond. The story CEO and founder Andrew Mason told in his recent interview with Charlie Rose was that when they offered helicopter flying lessons in one of their daily email blasts, they sold 2,500 in one day. This compares to a business that had acquired only 5,000 customers in its 25-year history.
But haven’t we seen this movie before in the world of direct marketing? History has shown nearly every major new direct marketing paradigm sees impressive initial response rates, but depressing response rates over time.
For example, when display advertising was innovative in the late-1990s (remember websites without ads?), publishers saw click through rates in the 1-2 percent range, allowing advertisers to be charged a high cost per thousand impression (CPM) in the range of $35-40. Today, iMarketer and MediaMind report that display advertising click-through rates are 0.10 – 0.20 percent and CPMs of $2-3 – less than one tenth what they were ten years ago.
Email has shown a similar sharp decline over time. Average click through rates for the early years of email campaigns in the 1990s were as high as 30-40 percent. Today, they range from three to five percent – again, a 10x drop.
Groupon conversion rates, supposedly, are now in the three to four percent range. What will those same response rates to the same consumers look like in five years? Will daily deals follow a fundamentally different model than every other new direct marketing medium? The benefit of being only two years old is that you don’t have a lot of vintage data to analyze.
What has impressed me about e-commerce stalwarts like Amazon.com and Netflix is that they have stood the test of time and have grown ARPU (average revenue per user) over time. Consumers continue to have an appetite for books and movies, year-in and year-out, and the volume of new content changes rapidly. In contrast, the merchants in my community and the ones I regularly do business with do not change all that rapidly.
That said, Groupon is building a huge consumer database, a massive set of merchant relationships and a super-talented management team. Just as Amazon and Netflix have innovated beyond their initial model, Groupon has the capacity to replicate these results.
But if the company is going to step into the multi-billion dollar winner’s circle, it will need to find a model that stands the test of time, and the reality of depressing response rates over time.
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