September 28, 2011, 12:57 PM

Groupon’s e-retail dreams

The daily deal provider gets into flash sales and launches a loyalty program.

Zak Stambor

Managing Editor

Lead Photo

While Groupon Inc. faces scrutiny in its bid to go public, the daily deal leader isn’t standing still—it’s evolving its business model with marketplace and loyalty offerings.

Groupon today launched Groupon Goods, a Woot-like bargain site where consumers can buy a small number of products from a mix of national and local merchants for a set period of time, typically about two days. This is not the first time Groupon has enabled merchants to sell products on its site, but it is the first time the daily deal provider has organized several product offers under the banner Groupon Goods.

"It’s a test we’re doing to gauge consumer interest in goods rather than experiences," says a Groupon spokeswoman. "Goods will never will be a laundry list of products. These are products we’ve hand-curated, not just whatever happens to be on sale this week, but products that we think might be interesting for consumers to buy."

Groupon Goods today features five products, including a X5 Superlite Ionic Hair Dryer sold by DiscountBeautyCenter.com for $69, a 47% discount from its $130 retail price, and a 32-inch Panasonic LED HDTV sold by Beach Camera for $440, a 37% discount from its $700 retail price.

Consumers receive the offerings via e-mail. The consumer then can learn details about the product by clicking through to a one-page product description. To purchase, the consumer clicks a Complete Order button that takes the shopper to a streamlined one-page checkout.  The checkout is pre-populated with the subscribers’ stored payment and shipping information.  The consumer then confirms the transaction to complete the purchase.

The offering could challenge other value-focused retailers like Wal-Mart Stores Inc. (No. 6 in the Internet Retailer Top 500 Guide), online marketplaces like eBay, and flash-sale operators like Gilt Groupe Inc. (No. 49), says Scot Wingo, CEO of ChannelAdvisor Corp., which helps retailers sell through e-marketplaces. “These purchases will take money from somewhere else, they’re not incremental,” he says. “And they’re clearly tailored to the value-focused consumer.” Wingo says it will also likely spawn competing programs, as LivingSocial already has a similar program in the works.

The strength of Groupon Goods comes from the daily deal provider’s 115 million e-mail subscribers as of the end of June; they are used to receiving the company’s e-mails daily, says Wingo. Based on the growth rate of Groupon’s subscriber base, Wingo estimates that Groupon’s subscriber base has hit some 134 million.

“What’s exciting is the number of consumers they touch,” he says. “While Amazon.com may have 130 million active buyers, those people aren’t all interacting with Amazon daily. But Groupon touches its subscriber base daily, which you can’t say about anyone else in retail, with the exception of flash sale sites.”

Based on the assumptions that Groupon Goods has roughly 134 million subscribers, has an average order value of $50 and a conversion rate of 0.1% to 1%, Wingo estimates the marketplace could quickly achieve $4 billion in annual revenue, though he did not detail the potential timetable for meeting that mark.

Most marketplaces, like Amazon.com and eBay, charge retailers 10% to 20% of a product’s sale price, which many merchants consider a marketing expense. Wingo, who was briefed on Groupon’s marketplace model, declines to comment on Groupon’s commission from sales on Groupon Goods. However, he says that unless Groupon operates within the typical range, it is doubtful that merchants would sell on the marketplace.

Groupon also today announced plans to launch next month a loyalty program called Groupon Rewards. The program, which will debut in Philadelphia and Chicago, aims to address  a common complaint from merchants that offer discounts via daily deal sites: that they attract bargain hunters who come in once with a voucher and never return.

Merchants can sign up for the program on Groupon’s web site. To participate in the program a merchant need not to have offered a Groupon voucher.

When a consumer purchases a voucher for a merchant participating in Rewards, he is presented with the option to sign up for the Rewards program in his voucher confirmation e-mail. Consumers can also learn about Rewards on Groupon.com or via a sticker participating merchants' can affix on their doors.

The program ties rewards to the amount a consumer spends with the participating merchant, not the number of times they visit it. Consumers earn rewards at merchants by paying with the credit or debit cards they have on file at Groupon.com. After spending an amount set by the merchant, the consumer unlocks the ability to purchase a special Groupon discount voucher for that business.

"For consumers, this is the easiest rewards program in the world," says Jeff Holden, Groupon’s senior vice president of product. "There's no cumbersome check in process—just pay with your normal credit or debit card and Rewards works behind the scenes."

Rewards is the third prong of Groupon's merchant services suite, says the spokeswoman. Vouchers offer a customer acquisition channel, Groupon Now helps merchants attract consumers during slow periods and Rewards aims to help merchants' attract loyal customers.

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