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I applaud Groupon for its success. I am a supporter of the web-based discount coupon business model. It just makes sense.

E-commerce works when it does not stray too far from the way the mass-market shops. Think about it, local stores thrive on deal-of-the-day shoppers. I remember when I was a kid and my mom would go through the daily newspaper looking for sales (deals) for the day in the local grocery store or supermarket. Man‼ Absolute genius.

It actually takes the local advertising model I had been envisioning and have implemented in my own ventures, one big step further. Essentially, by acting as an assurance contract, Groupon facilitates discounts; the risk to retailers is mitigated.

However, the business model is one that can be easily copied and executed by others vendors. Groupon is now facing significant competition from other deal-of-the-day companies. The key to Groupon’s woes has been the willingness of competitors to take a smaller cut of a voucher’s value.

The one thing many analysts have ignored is many of the companies that have begun to significantly erode into Groupon’s business are launching like they are “locals” who quite frankly do not need a whole lot of capital to get their websites up and running.

All a competitor has to do is cut a few deals with mid-sized food and restaurant chains to get off the ground.

Even worse for Groupon, is that none of their deals are exclusive. Why is that bad ? The answer is simple: none of Groupon’s customers are sticky, beholden, loyal, or required to do business with Groupon.

Can it get worse? Yes. Imagine this: Groupon’s way to compete is to lower its cut of each deal. In other words, Groupon gets into the worse kind of business war; a Price War. In the case of deal-of-the-day coupon companies, the “price” is the cost to their retailer customers.

Price wars are not pleasant. In order to generate business the companies need to lower their prices, which leads to lower margins and maybe higher revenues. However, once a price war starts the usual way of winning the price war is by continually cutting your price until one company has outlasted the competition.

This is going to be one long and messy business war. However, it will be entertaining.  At the rate things are going Groupon's revenue per customer may end up being $5.  In other words, instead of Groupon pocketing 50% of a voucher's sales price, it may only be able to pocket 10%.

Groupon's IPO may not be as big as folks hope. The banks that are managing Groupon's IPO are going to have to somehow hypnotize folks into believing Groupon is the only game in town.

Hype versus Reality.

It was brought to my attention, by a smart colleague of mine, that I had been looking at Groupon from the coupon/voucher company's point of view and not the retailer's point of view.  Well, that being said, my question now is if Groupon is taking such a large cut of the voucher's value then how does the retailer make any money at all?  A 50% cut will eat right into the profits of the retailer.  A good point raised by my friend and colleague.