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June 3, 2011

Taking On Groupon : Know The Challengers

Hundreds of start-up companies — imitators of Groupon, the group-buying Web site that offers daily deals on knitting supplies, skydiving lessons, barbecued ribs, pole-dancing classes and a smorgasbord of other stuff you may (or may not) want — are racing to find out.

Groupon’s competitors have been called groupies, copycats and clones. But who can blame them? In just over two years, Groupon has accumulated 60 million subscribers, more than $1 billion in venture capital and $760 million in annual revenue to become the fastest-growing Web company ever. In December, it declined a $6 billion buyout offer from Google.


Taking On Groupon : The Daily Deal Market Analysis for Followers and Challengers

Recently  Businessinsider posted   a blog written by  Jim Moran  who is the  co founder of Yipit.

For the most part, daily deal services grow by acquiring users through various online advertising channels. The most important determinant is the Annual Revenue Per Subscriber (ARPS), which drives the Cost Per Acquisition (CPA) each service can afford to pay when acquiring new subscribers. The higher the Lifetime Value, the higher the CPA, the more users the service can buy and the faster the service will grow.

ARPS is determined by the following formula:

1)Avg Deal PriceAvg Commission % * Deals Per Year * Conversion % Per Deal * (1 – Annual Churn) = ARPS 
Ignoring profitability (fierce competition), Cost Per Acqusition is determined by:

2)ARPS / (1 – Viral Coefficient) = Max CPA

Making simplifying assumptions about the cohorts / quality of users, Daily Deal services grow by spending as much as possible within their Max CPA.

A remaining factor is the cities in which a service operates. The number of cities functions as a multiplier to the subscribers a service can add (more cities means more people). More importantly, the cost to acquire users varies by city. Cities with less daily deal competition have a lower average CPA, thus services can grow there more quickly.

How These New Services Are Succeeding

The challengers are focusing on various components of these formulas to drive their growth:

  • Avg Deal Price. All else being equal, a higher average deal price translates into a higher CPA. Tippr offers the highest average deal price of the group, at $51, followed by DealOn at $43.

  • Conversion %. While a higher deal price means more revenue per deal, on the other hand, a low pricepoint may drive more conversions. KGB Deals has perhaps been the most aggressive, with deals including $4 for a $12.50 Movie Ticket at any AMC Theater.

  • Viral Coefficient. The higher the viral coefficient, the higher effective CPA a service can afford to spend. GigaOm’s Liz Gannes wrote a thorough review of the viral levers HomeRun is building into its product.

  • Cities: DealOn, Tippr and KGB Deals have been aggressively expanding to new markets.