Equanimity

A few weeks ago I wrote about Groupon and how it has flourished as an entrepreneurial business. Groupon serves two groups of customers: the consumers who buy the coupons, and the small businesses that run deals with Groupon.

Posie's Cafe and owner Jessie Burke

While Groupon does a pretty good job of satisfying the first group, there are a few recent incidents that have emerged putting Groupon’s relationship with its small business partners in the spotlight. Portland-based Posie’s Cafe ran a “$6 for $13 of Bites and Beverages” deal in March 2010, and with almost 1,000 vouchers bought, the owner made claims that she lost over $8,000 at during one month of the process. Groupon also sold 2,000 vouchers for a photography business in Marietta, GA, when it emerged that, not only could the business possibly serve that many consumers in a year, but the owner was advertising with stolen photographs.

Groupon’s blog post in response to Posie’s brought up a good point that had been lost on me as a consumer: Groupon is essentially an advertising service, more so than a coupon/discount provider. Small businesses pay (or sacrifice) by splitting 50% (usually) of the coupon’s revenue with Groupon for getting its name out there to Groupon’s massive emailing list/network. The profits only roll in once Groupon customers become repeat ones or buy more than the $13 of discounted products.

This, in my mind, begs the question: are all of Groupon’s business practices ethically sound? The situation with Posie’s raised the point that Groupon takes 50% of a deal’s revenue for a pretty low value-added service. Regardless, it is the responsibility of business owners to critically consider the opportunity costs of offering a Groupon for their business. Hopefully they will learn from Posie’s and others before making any rash business decisions.

QuickMBA differentiates an entrepreneur from other small business ventures by 4 qualities:

1. Large generation of wealth
2. Rapid generation of wealth
3. High risk
4. Innovation

As I am quite interested in the world of tech startups and internet ventures, one business that fits the above characteristics sticks out in my mind – Chicago-based group-buying daily deals site, Groupon.

It’s no secret that since the startup began in 2008, Groupon has become wildly successful, spawning clones left right and center in the US and China (in the hundreds!). As the article mentions, Groupon raised $1 billion in valuation in half the time that Twitter took, and half a year faster than Facebook. Estimates have put Groupon’s pure profit at $1 million a week, a huge amount for a relatively new business with minimal overhead costs – they sell no tangible products, only virtual vouchers. Hence, Groupon clearly fits the first two definitions of an entrepreneurial business.

In terms of high risk and innovation, when these two characteristics are applied to Groupon, they kind of go hand in hand. Groupon began the collective buying craze with an unprecedented model, and with any new online/tech startup, there is risk of failure (and social media mockery). Groupon also breaks one of the fundamental startup rules – basing your success purely on that of others. Nonetheless, it seems to be working… for Groupon itself. There is debate about the effect Groupon has on some of its small business partners – but that’s a topic for another post.

Despite all its heralded success and popularity, there have always been questions surrounding Twitter and its ability to generate profits since it burst onto the scene in 2009. Twitter has been criticized for its lack of a profitable business model, despite strong venture capitalist backings and funding of $160 million.

With all the hype surrounding Social Media in the past year, especially as a business/marketing tool, it’s an important question to consider – when/how does the hype and popularity translate into monetary value?

Earlier this year, Twitter launched its advertising platform known as “promoted tweets”. Basically, companies can send out a tweet from their company accounts, and pay Twitter for the tweet to be at the top of search results in which the tweet appears. Sometimes, promoted tweets/hashtags also appear in the trending topics list.

That’s how I came across the hashtag #GroundRules, a promoted tweet from @JetBlue. For some reason it caught my eye, and clicking the tweet lead to this video:

I found this advertisement quite interesting because, rather than pushing the product, it is emphasizing a purpose: customer empowerment. This made me think back to class 1, when we discussed Ryanair and its many cost-cutting tactics. For being in an industry in which rising fuel costs and regulations are forcing airlines to charge for meals, pillows, blankets, and maybe even to use the toilet, JetBlue has chosen an interesting point of differentiation.

Currently, the jury is still out on whether Twitter’s promoted tweets are proving profitable for Twitter and the promoted companies. However, if Twitter and companies continue to work in tandem to create innovative and interesting content like above, I think there will be a time in the future when we finally stop asking, “is Twitter profitable?”.