Google launched its Groupon-killer, “Offers,” in Portland, Oregon, about a month ago.And now it’s gearing up to launch in San Francisco and New York.
Could Offers become a massive new revenue stream for Google–the “second huge growth engine” that Google has long searched for in vain?
Could Google’s entry into the deals business clobber Groupon and other deal providers like Living Social?
To begin to answer these questions, we spoke to representatives of merchants who have signed on to offer Google Offers in New York. We also spoke with Google’s Eric Rosenblum, the product lead on Offers, and Google spokesperson Nate Tyler.
And it turns out that Google Offers does have a few key advantages over other deal providers that could shake up the deals industry and force Groupon, at least, to change the terms of its deals.
In other words, if Google makes a big commitment to the deals business–a big if–its entry into the market could hurt the businesses of Groupon, Living Social, et al, even if it does not end up “killing” them.
THE GOOGLE ADVANTAGE
The deals business is a “chicken-and-egg” business. To sell coupons (and get a commission), you have to 1) persuade merchants to offer the coupons, and 2) persuade consumers to buy them. Failure on one side of the business means failure overall: You have to succeed on both sides at once.Google’s competitive advantages come on both sides of the deals: The distribution side (consumers who buy the “offers”) and the merchant side (merchants who sell products and services through the offers.)
Let’s start with the merchant side…
THE MERCHANT SIDE
To get consumers to buy coupons, you have to provide them access to great deals. Specifically, you have to persuade merchants to provide major discounts on products and services that consumers want. If a deals provider like Groupon or Google continually offers excellent deals, consumers will seek it out, which will take care of the other side of the equation (distribution).
Thanks to the already intense competition in the deals industry, however, it’s not easy to get merchants to give you great deals. To get great deals, the deal provider needs to have both great distribution (lots of consumers eager to buy the products) and the ability to offer merchants advantages that other deal providers don’t. And, for now at least, Google’s Offers business has some clear advantages.
According to a Google Offers boss Eric Rosenblum and a New York-based merchant who has now signed deals with three deal providers (Groupon, Gilt City, and Google), Google has three major advantages over the competition:
- Vastly better payment terms than other deal providers, especially compared to Groupon. Google Offers will give merchants 80% of the merchant’s share of voucher revenue within 4 days of the voucher sale, and the rest within 90 days. The payment terms for Groupon and Gilt City are longer than this (Groupon pays in three equal installments: One in ~5 days, one in 30 days, one in 60 days). Merchants that offer vouchers have to provide the product or service they are selling as soon as the voucher is sold. When merchants use Google’s deal service, they will get the cash for these products and services much more quickly than they do with Groupon.
- In some cases, Google pays merchants for vouchers that are sold but not used; Groupon doesn’t.* After every deal is sold, coupon-buyers do one of three basic things: 1) They redeem their coupon for the product or service it covers, 2) they request a refund on their coupon, or 3) they forget about the coupon and neither redeem it nor request a refund. There are three different ways that the deal providers treat the third outcome–unredeemed coupons–and Google’s current method is much better for merchants than Groupon’s. Specifically, Google gives money from unredeemed (and unrefunded) vouchers to merchants. Groupon, meanwhile, in some cases*, automatically refunds unused vouchers to consumers, returning the purchase price to the consumers who bought them. Groupon’s practice is obviously better for consumers. But Google’s is better for merchants. And one merchant we spoke to expects the amount of money involved to be significant. *UPDATE: In the US, Groupon’s “automatic refund” only applies to a product called Groupon NOW. For other offerings, Groupon passes the money through to the merchant regardless of whether the coupon is redeemed, the same way Google does. Internationally, Groupon operates as described above: Merchants are only paid for coupons that are redeemed. Our original post implied that the policy we described applied to ALL Groupons. We apologise for this.
- Google will eventually “distribute” deals to consumers through many other channels in addition to email, including search ads, display ads, Android phones, Google Wallet and “Places” pages. Google is developing several new tools that will make its “Offers” product a much broader marketing engine than a “daily deal” delivered in an email. Some of these tools are in beta, others haven’t yet gotten that far. Groupon, Living Social, Gilt City, and other deal providers have expanded into apps and other distribution channels beyond emails, but Google’s AdWords, AdSense, Gmail, third-party site network partners, and other global products give it an immense portfolio of tools with which to distribute deals. This could eventually prove to be a huge competitive advantage.
Now, in New York at least, Google’s salesforce is also selling its Offers service with a fourth competitive benefit, one that Google’s management disavows: “SEO benefits.” Specifically, a merchant tells us, at least one of Google’s New York salespeople is promising “SEO benefits” to merchants who sign up for Google Offers–the benefit of becoming “No. 1 in Google.”
Importantly, “SEO benefits” is not an official benefit of Google Offers, and it would be highly controversial it it were. Google is already the target of an FTC investigation into whether it uses its search dominance to help its business and harm its competitors, and tying Offers to the search business would create an uproar.
Google spokesperson Nate Tyler told us categorically that “Google Offers has no influence whatsoever on the ranking of Google search results.” He also said that Google Offers clients also do not get any special treatment with respect to AdWords (sponsored search links), which Google Offers salespeople do not sell. Tyler concluded that “There appears to be a misunderstanding between the salesperson and this merchant.”
(The merchant says there was no misunderstanding–“no code words, no maybes.” This is an important issue, so we looked into it closely. We’ve discussed it in detail here.)
So, adding together these three benefits on the merchant side, Google Offers appears to have significant competitive advantages over Groupon and some of the other deals vendors. This should allow Google to sign up good deals, at least in the early going. (If the deals don’t sell, all bets will be off.)
Importantly, Google’s payment terms could also force Groupon to improve its own payment terms, which would have a major impact on Groupon’s cash flow. Right now, Groupon’s business is cash flow positive, because it collects cash from new Groupons long before it has to deliver that cash to the merchants who sells them. Shortening its payment terms would likely vastly increase Groupon’s cash needs.
The Salespeople Problem: Google will need thousands
Google’s biggest disadvantage on the merchant side, meanwhile, is the lack of feet on the street. At least for now, selling deals to merchants is a one-on-one sales process, and Groupon has hired thousands of salespeople to do this. A merchant we spoke to in New York says Google already has “a fleet” of salespeople in New York, but New York is only one market.
To compete against Groupon globally, Google is likely to have to hire thousands of dedicated Offers salespeople. And this will be a big change for a company that has long prided itself on its self-service ad solutions and engineering-focused culture.
According to Google’s Eric Rosenblum, the Offers boss, Google intends to deal with the “salespeople problem” by making the Offers product as much of a self-serve solution as AdWords. The company’s hope is that merchants will eventually do most of the work, and the company won’t need so many salespeople. But in the beginning, if Google Offers is to become a big force in the deals space, Google is going to have to hire thousands of salespeople.
And now let’s look at the consumer side of the deals equation…
THE CONSUMER SIDE
On the consumer side of the deals business, Google’s biggest disadvantage right now–and it’s a big one–is its lack of distribution.
At the end of March, Groupon had a list of 83 million subscribers worldwide (more now), all of whom have signed up to receive its deals. Google, meanwhile, has only just started signing up consumers who want to hear about its deals.
The good news for Google is that deals business is mostly a local business, so “aggregate” subscriber numbers are less meaningful than they are with other products. On a market to market basis, Groupon’s lead is less daunting.
Google also has several potentially huge distribution advantages that Groupon and other deal-leaders lack. Namely,
- 1+ billion unique users worldwide on its own sites
- Access to 100s of millions more uniques via third-party sites
- Gmail (tens of millions of email subscribers, all of which can be geo-targeted)
- AdWords (massive global keyword advertising system)
- AdSense (massive global display ad business)
- Google “Places” (local company listings, a la Yelp)
- Google Wallet (forthcoming mobile payment, deals, rewards solution)
Over the long haul, Google intends to use this global platform to approach Offers distribution much more comprehensively than via a daily email.
This approach will start with the “My Offers” feature that is already visible on Google’s Offers page. “My Offers” allows users to save offers they like in My Offers and then view them whenever. See upper right in screenshot below:
For now, Google is distributing Offers primarily via email like Groupon, but soon Google will be putting Offers in front of consumers via several different channels, including:
- Targeted ads (AdWords and AdSense all over the web), via “in-ad” offers
- Merchant “Places” pages, which will allow merchants to put Offers directly into their pages
- Android phones, via a “nearby Offers” features that enables you to tap the phone and see all the Offers nearby
Any time a consumer sees an Offer he or she likes in any of these channels, the consumer can save the Offer to his/her My Offers account. (Greg Sterling at Search Engine Land spotted a few of the in-ad Offers in the wild. Click here to see them).
Then, when Google Wallet rolls out, Google will combine payment and offers and rewards, so that if you shop in a store with an offer (or an offer saved in your MyOffers), you’ll be able to pay and get the credit with a single tap. If Google gets Wallet right, and consumers aggressively adopt it, the convenience factor of having all your offers and relationship and payment tools available via a single tap will trump anything else out there.
Overall, Google has a massive global platform and portfolio of tools with which to compete against Groupon et al. If Google chooses to use its global platform to push Offers aggressively–and this is a big if–it could rapidly gain ground against Groupon, et al.
Google’s Biggest Disadvantage
Google’s biggest disadvantage in the deals business will likely be the same disadvantage that has seen it launch dozens of cool and potentially game-changing products over the past decade only to see most of them fail miserably.
Lack of focus and commitment.
Groupon has grown to a $3 billion company in two years because it has hired 7,000 people to build its deals business. Google’s Offers team right now probably numbers in the dozens.
Google’s global platform is potential a massive competitive advantage, but Google is already using that global platform to try to compete in dozens of other businesses, each of which features huge, focused competitors.
Thus far, with the notable exceptions of Gmail, Android, Chrome, and a handful of other successes, most of Google’s “us, too” products have launched with great fanfare and promise and then died on the vine.
If Google wants to make a real dent in the deals business, it is going to have to dedicate billions of dollars and thousands of people to the product. It is also going to have to pass on building other products that could potentially be big businesses, because no company can do everything.
Based on Google’s track record to date, we are sorry to say, the odds that Google will make a big enough commitment to Offers to allow it to succeed are low. More likely, the company will tinker with it for a while, hoping to figure out how to make it take off in a “Googly” way. And if/when that doesn’t happen, Google will likely shut the product down.
But perhaps (there’s always hope) Google has finally learned its lesson on this and will make the necessary commitment to Offers.
And it should.
Because the vision for a unified “electronic wallet” that contains all of a consumer’s payment tools, rewards, relationships, and offers is a powerful one. And if Google can manage to get that right, the Offers business could be a huge global revenue opportunity.
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