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The Demise of the Groupon Model

Stocks in this article: GRPN AMZN GOOG

NEW YORK ( TheStreet) -- Two decades ago, before most reporters had even heard of it, I became an expert in Internet commerce.

I learned that all publishing is an effort to push people down a sales funnel. Ads are not really meant to be clicked; they're meant to draw buyers. The closer an ad gets someone to buying something, the higher its value.

The big argument has always involved intrinsic or extrinsic targeting. Do you click on an ad because it knows who you are, or because the content surrounding it describes what you might buy now? If you see a local ad at the BBC News' Web site, that's intrinsic targeting. The ads here at represent extrinsic targeting.

Social media is designed to create targeting without the cost of creating relevant content. You associate with like-minded people and become more easily identifiable to advertisers. The hope is your friends might even drag you down a sales funnel with them -- that you will buy what they bought because you trust their judgment.

Groupon (GRPN) bypasses much of the targeting argument. It gives you a merchant's best price, but it also removes risk from running a sale. The merchant doesn't have to sell until enough people agree to buy for him or her to at least break-even.

It was a compelling idea a few years ago. Early Groupon letters were crafted by trained writers, dramatically boosting their yield. But just as with the original Yahoo!, which was a directory created by editors, this couldn't scale. Good writing and careful targeting are rare, not plentiful.

Another Groupon problem is faced by players pursuing every new Internet-commerce idea: Innovation wears out. Once, people clicked regularly on Internet banner ads and responded to email appeals. Internet-commerce concepts aren't like safety razors, they're more like razor blades.

Supporters of Groupon consider its business just another form of advertising, paid for by coupon redemptions over time rather than up-front, as I learned while writing about the company for Seeking Alpha recently. Opponents say Groupon offers only attract bargain-hunters, and merchants don't get repeat business by giving their best deals to those people.

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