With the news abuzz around Google’s deal with Groupon falling through (a rumored $6B deal), one has to wonder why Google was so interested in acquiring a group coupon start-up in the first place… here’s why:

• Changing the Success Metric: Having tackled the coupon and promotions industry in the past, one of the biggest hurdles businesses face with the traditional coupon model is the incredibly low response rates on coupon redemption. Most companies that leverage coupons are happy to get a 1-2% response on their direct mailings and the risk sits completely in their court. Groupon has introduced a system that transfers the risk away from the business with pre-paid purchasing of coupons and thus has changed the way a business evaluates the success of a coupon campaign.  Buyers on the other hand (having subscribed to the service) are in a permission-based environment where the deal does not appear as solicitation, but rather as a welcome communication from a member business with a deeply discounted service or offering.  This changing of the model brings greater satisfaction to both parties involved in the process.
• Breakage, breakage, breakage: Groupon has defeated physics and has changed the anatomic structure of a coupon… well not really but in some ways, yes.  What was once a push mechanism for retailers to spam individuals with potential marketing offers has transformed into a pull system.  Groupon has taken the philosophy of a gift card (up-front payment, stored value, and breakage) and applied it to coupons.  For businesses, this is the best of both worlds… low risk for participating virtually (no more mass printings, mailings, art work, lengthy delivery time frames, etc.) with the combination of up-front payment and increased breakage by consumers (for those who don’t know, breakage is the percentage of customers who never redeem something of stored value… usually a gift card [which after a certain period of time can be recognized as a revenue instead of a liability]).
• Global Exposure: Groupon has done a great job of making strategic alliances in other cities around the world (i.e. MyCityDeals in the UK) in order to bring the Groupon concepts to localized areas.
• Collective Buying Power; Collective voice: While Groupon thrives on it’s concept of collective buying power, it achieves this through the collective voice of its customers that spread the word by mouth daily on a single deal.  Instead of having a lot of people spreading the word about a lot of deals and losing the inertia, you get one large group dedicated to one deal which also brings the business that is featured into the limelight and makes their potential for reward even greater.
• Google’s Ad Platform is getting stale: People are smarter, the way we accept solicitation is changing and Google realizes that unless it changes the model that it has built around paid per-click and paid SEM it will continue to hemorrhage potential ad revenues to up and coming platforms like Groupon.

One the other side of the web, Jeff Bezos CEO of Amazon is also making a play in the collective buying space by investing $175M into the LivingSocial platform, a close competitor to Groupon.  While the site offers much of the same functionality and localization of content around the globe, it still hasn’t gained the momentum that Groupon has established but, is not far behind. If there is one thing you can be sure of, its that Jeff has been salivating over the idea of collective buying for awhile now (with the acquisition of Woot.com and now the investment in Living Social) it will be interesting to see how he brings this concept into the core Amazon.com platform.

The next 18 months will tell a lot about the maturity of these two start-ups and I have no doubt we will see an acquisition in the not so distant future (even though Groupon has dreams of IPO).