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The Appeal of Coupons

June 17, 2011, 12:27 pm

Ages ago, I was an executive at Mercata, an Internet store whose strategy was to sell items whose price would go down as more people agreed to buy the item.  In theory, this creates an incentive for viral marketing, as anyone who buys has a financial incentive to get their friends to join in.

The company died for a variety of reasons, in part just because like many startups in that weird era of the late 90's, we just built up too many fixed costs too fast to reach breakeven in any reasonable amount of time.  We were also ahead of our time in some ways -- the model makes a ton more sense in the Facebook / social media age.

But we also failed, as did many Internet stores, because order fulfillment, product inventory, shipping, etc was and still is expensive.

Glenn Reynolds notices that a lot of folks (including Amazon in his link) are selling coupons.  This may be a blinding glimpse of the obvious to all of you, but the appeal of a retailer of selling coupons online is that they are virtually free to inventory, to fulfill, and to ship.   Think of it this way -- you want to compete online on price.  You can actually sell the physical stuff at a discount.  Or you can sell the coupon, which gives access to the customer access to the same discount but is much easier to fulfill.  It also lets you "sell" things you normally can't provide over the Internet, like a restaurant meal.

The model is not that compelling to me, because I shop online for the convenience rather than the price.  I buy some Groupon type coupons, but generally for things like restaurants rather than products.

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Category: General Business
  • NikFromNYC

    We may all need coupons soon:

    http://oi53.tinypic.com/2yulrw7.jpg

  • TVH

    Warren, thanks for commenting on this subject. A lot of people back here in Seattle ask me about Mercata these days, the company you, I, and a bunch of other good folks built back in 1998-2001.

    You fail to mention our great timing, as in filing our S-1 the day before the Nasdaq peak in March 2000. Of course, we were too early and could not benefit from Facebook and smartphones, but we did get a lot of new accounts from viral e-mail marketing.

    All of our patent filings eventually did issue (I continued to assist Vulcan, our lead investor, with them after we shut the company down in 2001), and eventually Vulcan sold the patent portfolio for an undisclosed sum to an investor/entrepreneur in 2010 who started his own coupon site named Tippr.com. It's unclear to me if he is using the patents to protect his site, or if he is attempting to extract royalties from the likes of Groupon and Living Social. Needless to say, I wish I had thought of buying back the patents at some point.

    On your point about coupons, you may remember that after selling physical goods via "We-Commerce" in "PowerBuys," we began to offer deals like rebates that grew in value as more people joined the group buying event. We had a very successful "PowerBuy of the [GM Buick] Century" in which a manufacturer's rebate grew in value from $50 to about $500 as the number of participants in the deal grew over the course of a week. Having proved the notion of a growing rebate or coupon on something as expensive as a car, we then began to explore how to do this on less expensive products and services as well. This growing rebate or coupon idea was covered in one of our later patent filings.

    It will be interesting to watch how the group buying and/or coupon space evolves and fares. Looking at Groupon's financials in its recent S-1 filing, one does wonder whether they have "cracked the code" and will really become a sustainable, profitable, growing business over time.

    Thanks again for your help back in those crazy Internet/e-commerce days of yore.

  • http://herdgadfly.blogspot.com/ gadfly

    TVH wrote:

    "It’s unclear to me if he is using the patents to protect his site, or if he is attempting to extract royalties from the likes of Groupon and Living Social. Needless to say, I wish I had thought of buying back the patents at some point."

    According to Internet Retailer, "Patent trolls—organizations or individuals also known as non-practicing entities who seek rewards in patent infringement cases though they have no interest in using the cited patent to operate a business—are continuing to target retailers who use e-commerce technology." Patent lawsuits are up by 400% since 2001.

    So all Tippr.com needs to do is put a lawyer on retainer and start sending out royalty notices to all the local coupon websites that are popping up in every town with six-figure populations. Tell them the royalty is $30,000 but an immediate of $5,000 will buy rights to use the patent. Read about PANiP HERE. Honesty is the best policy!

  • enviromama

    As a consumer, I love Groupon and check it just about every day. My extended family recently went on vacation to Southern California and we used Groupons to take 2 Segway Tours. One in San Diego/Gaslamp and one in Huntington Beach. Without the coupons, we likely would have taken only one tour, and it would have been of a much shorter duration. I also got discounts at a half dozen restaurants.

    I realize that vacationers are non-repeat business, but we do write recommendations at several sites for the products that are really special. Thanks to Groupon and thanks to Algore for inventing the internet.