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Summary:

On the surface, the fast-growing daily deal site Groupon and eBay have little in common, but, according to CapLinked CEO Eric Jackson, the economic factors contributing to Groupon’s growth would be doing the same for eBay, had eBay not made a long series of strategic blunders.

Groupon screenshot

Groupon screenshotA pair of ecommerce powerhouses made news last week for very different reasons. The fast-growing daily deal site Groupon was courted by Google for an acquisition valued at up to $6 billion before the talks fell through. Meanwhile, a New York Times report highlighted how moribund eBay has become, saying that revenue from the company’s auction site will be outstripped by its subsidiary PayPal within a few years.

At first glance these stories have little in common, but the truth is the economic factors contributing to Groupon’s growth should be doing the same for eBay, had eBay not made a long series of strategic blunders.

Groupon is still a relatively new service, which makes the acquisition talks with Google all the more impressive. Launched in November 2008, the company’s revenue is already reported to be around $50 million per month, with gross margins in the range of 50 percent. Its revenue grew by nearly 900 percent in the 12-month period through September. Forbes called Groupon the fastest-growing company in history.

This would be an amazing accomplishment in any business environment; it’s all the more impressive given the lackluster economy. But the terrible economy hasn’t been a barrier to Groupon’s success — on the contrary, it’s been a boost. To understand why, you first have to realize that small businesses in America are still in critical condition. A recent WSJ article noted that there are 100,000 fewer companies (with at least one employee) than there were a year ago. As the American consumer deleverages and the credit markets remain stagnant, small businesses are desperate for new revenue sources. Enter Groupon.

Businesses selling a product or service offer Groupon members a discount of 50-70 percent off the retail price and split the remaining proceeds with Groupon, which advertises the deal on its site and blasts it out to thousands of email subscribers. This discount and pricing structure leaves retailers with only 20 to 25 cents on the dollar, making a Groupon campaign far from a sure thing. A study by a Rice University professor recently found that one-third of Groupon promotions are unprofitable, and small business owners vocally debate whether Groupon is good for their business (e.g. the comment section of this NYT blog post). But whatever the risks, the weak economy is prompting small businesses to roll the dice with Groupon at a breakneck pace.

This environment should benefit eBay, as well. While pop culture portrays eBay as a site populated by collectors and hobbyists, small businesses have always been the backbone of its sales. The auction site left behind its Beanie Baby past in the late-90s as so-called “power sellers” — small businesses who used eBay as a primary distribution channel — flooded the site with electronics, computers, and even automobiles.

As I detailed in The PayPal Wars, we saw this firsthand at PayPal. The service started as a handheld mobile payment system, but we changed the product’s direction because small businesses on eBay desperately needed an alternative to paper checks and began encouraging their buyers to use PayPal. By the fourth quarter of 2003, eBay was moving three-and-a-half times more gross merchandise than Amazon, and a small industry of services built around eBay listing and inventory management was flourishing.

eBay should have been poised to share in Groupon’s recent success by giving small businesses a cost-effective sales channel to distribute goods and services. But instead, revenue from the site’s marketplace is stagnant, growing only 3 percent last quarter, compared to 22 percent for PayPal. The turnaround that CEO John Donahoe tried to jumpstart when he took the helm in 2008 still hasn’t arrived.

The reasons for eBay’s stagnation come down to leadership. During former CEO Meg Whitman’s tenure, the company’s culture became increasingly bureaucratic, and improvements to the site became few and far between. eBay hiked fees aggressively while doing little to improve its user experience. The company misjudged the threat posed by Google’s advertising network, which effectively decentralized ecommerce by making it viable for small businesses to sell directly from their websites. Also, as my former PayPal colleague Keith Rabois asserted, eBay started out as a fun, social ecommerce site but it failed to grasp the advent of social networking. As sites like Facebook and YouTube offered consumers new venues for amusement, eBay failed to adapt and actually became less fun.

The party may be winding down at eBay, but over at Groupon it’s in full swing. As an entrepreneur and advocate of small businesses (my own startup CapLinked gives companies tools to raise capital, find investors, and sell assets), I hope that eBay can roll back the clock and recapture some of that innovation it had a decade ago.

Or at least poach some of the Groupon team.

Eric M. Jackson was part of PayPal’s marketing team from 1999 to 2003, where he served as interim vice president following eBay’s acquisition of the company. He is the author of the book The PayPal Wars and currently is the CEO/co-founder of CapLinked, an online platform for companies to share deals and communicate with investors.

By Eric Jackson

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  1. Is this a sponsored post?

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  2. eBay used to be a garage sale and flea market. That meant you could get things not available in the retail channels, or partial items/antiques/one-offs, etc.

    Something changed. Now, it seems like most of the stuff there is regular retail items, at a slightly lower price than other sites like Amazon. Factor in the high shipping that most sellers seem to want to charge, and it’s not worth it.

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  3. I’m not convinced the two are really in direct competition. It seems to me that Groupon and eBay have entirely distinct markets.

    That said, I do think that Groupon and its ilk (Woot, etc.) need continued nurturing. Giving logical communities leverage to obtain bulk discounts is good for just about everyone.

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  4. Ebay is horrendous. I hope. . . with all that I have that another viable venue emerges for sellers and buyers to keep more money in their pockets, and more sanity in their heads

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  5. Sounds like somebody has an axe to grind…

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  6. This is a baloney post by a lazy axe-grinding scribe

    Just one example. Where do you get your Groupon numbers? Apparantly from Groupon’s propaganda department. Groupon’s gross margin can’t possibly be (as you write) “in the range of 50 percent”. Groupon pays out 50% of gross revenue to its merchant partners. Then it pays salary and commission to its now literally thousands and thousands of good old show-leather-based, man-in-the-street local sales people. So Groupon’s gross margins are likely down around 25-30%

    The entire blogosphere is so desperate for a bopnafide web2.0 hit, everyone is repeating totally nonsensical rubbish about Groupon, promolgated by Groupon directly to pump itself up.

    Turning down Google — no matter what the number was — will go down in internet history as a blunder of biblical proportions

    Hubris 2.0

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  7. Rohit Nallapeta Tuesday, December 7, 2010

    Great article! I think this article cleverly captures the advent of social commerce and how ecommerce is morphing into different forms. It kind of says selling goods on web store front is not the only way to get your customers.

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  8. crookedreporting Tuesday, December 7, 2010

    This article is an advertisement. you’re crossing the line here.

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  9. There are gross sales (income) and business expenses which give you a net margin. What is a gross margin? Groupon is still new and while it may be a darling of many, it has also received a lot of negative word of mouth from business owners. Groupon also has a lot to learn in terms of site performance, stability, and design. When the Nordstrom Rack Groupon was published, the traffic made for a very poor buyer experience. Buyers were also allowed to buy $50 GC for $25 from various cities then converting these GCs online to Nordstrom (not Rack) gift cards. The inability to print Groupons righ away is annoying. You also don’t have a clear way to integrate user accounts between Groupon login and Facebook login. Groupon is a one trick pony. It only has the first to market advantage and they will only be successful as the amount of white powder they can blow up the ass of business owners.

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  10. Groupon isn’t going anywhere.

    And the notion they can offer 50-75% off retail is absurd. They can only do that for products no one pays retail for in the first place.

    Ebay stagnated because they could. No different from Microsoft or Comcast or Intel etc. Lack of competition.

    They reached critical mass in the number of eyeballs and other auction sites couldn’t compete.

    So Ebay became the only game in town. Other sites could be better, but until they had eyeballs it didn’t matter. Catch-22.

    Now though competition has sprouted up in other places. Craigslist, Google ads and Amazon. You can sell on Amazon and its a hell of alot easier and slicker to do so although it’s not a place for one of a kind items.

    Today Ebay is just a pain the ass. I do think there is a certain customer that loves it and probably a non-credit card carrying customer or someone that shop there out of habit or folks that mistakenly think the best price will be on Ebay or folks that enjoy the thrill of bidding on something and getting a good deal every blue moon or finding those one of a kind items.

    If Ebay had competition though you’d see a much easier to use and slicker site. Now it’s a just a mess of a site.

    And Paypal? atrocious because of the fees they charge. 3% to use your own money? OUch. Make sure you use credit card to fund your purchases so you can justify the 3%. And if you ever have problems? Good luck. Nice friendly customer service people who have no power to do anything for you or won’t.

    I use these services occasionally still, but what I wouldn’t give for a little competition.

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