Burning piles of cash to swiftly vanquish rivals and grab what business school professors call the “first mover advantage” can work. Just look at Amazon. So, too, Groupon thinks a chunk more capital can solidify its position atop the Internet coupon heap. But this strategy generally only succeeds when it creates costly barriers to entry. Groupon is trying, but there’s not enough evidence yet to justify a valuation of more than $11 billion.
No question, it pays to be first. Discover gold, and surrounding claims come more cheaply. Install software on a company’s computers and rivals will struggle to displace it. Once dominant players emerge, the going gets even tougher. Any challenger to Amazon today would have to build a costly logistics system to match its prices.
Groupon is far larger than its biggest rival and growing. In the third quarter, sales grew more than four-fold to $430 million. An initial public offering could give it $540 million to expand in new categories and stock to use for acquisitions. But there are no mineral claims, customers aren’t captive, and it hasn’t spent billions on infrastructure. Moreover, the value of its brand isn’t obvious, as it’s essentially a reseller of others’ products.
Groupon does have value. It has scads of email addresses and purchasing details from proven customers. For local and national businesses hoping to generate demand for their products and services, that kind of scale makes Groupon a natural first call. That should translate into Groupon offering better deals than its emerging rivals, which provides customers a reason to keep opening Groupon emails.
High barriers to entry reduce competition and lead to higher profits. Groupon ran about break-even in the third quarter as marketing costs shrank. That’s better than the $100 million it lost in the second quarter, but cutting marketing may have a long-term cost given the low walls protecting the business. It’s not clear whether this is a sustainable benefit to accrue from being first or a way to gussy the company up ahead of its IPO.