I have been talking to a few people about what can possibly make Groupon worth so much, since it is a bit hard to conceive – this article I think does a good job of explaining possible reasons why:
Enter Groupon, the new Valpak
What makes Groupon special is not its much talked about tipping point where a deal does not happen unless a certain number of people sign up.
Due to Groupon’s broad traction, virtually every single one of its deals gets sufficient signup to convert. Groupon was the first company to use the tried-and-proven sales technique of the yellow pages and Valpak to target local advertisers – direct, door-to-door salespeople who sign up local services and retailers. Groupon has quickly built a direct salesforce that has signed up local businesses across the country.
While detractors of the Groupon model point out that the net of a Groupon campaign often results in a loss to the local business, they are not considering that all advertising at the outset is typically a loss to a local business. A local TV ad, local newspaper ad, or Valpak coupon also costs money that could be considered a loss and typically does not produce immediate positive cash-flow relative to the ad investment. The value of a Groupon promotion produces cash over time with new repeat customers and should be viewed as a customer acquisition cost, which typically must be amortized over time. In addition, Groupon is also launching a service with 10% discounts that is much more in line with typical couponing systems.