Knowledge@Wharton carries an interesting story on Groupon titled Forecasting the Future of Groupon. i spoke to the reporter prior to the article’s writing. My view on Groupon is that the business is based on sound fundamentals. Customer acquisition is expensive for small businesses and Groupon & other sites can bring in new customers more effectively and at a lower cost than many other customer acquisition channels. There are of course many challenges, including customers getting overwhelmed by emails from all the group buying sites and businesses worrying about adverse selection (most price-sensitive consumers may be drawn to Groupon) and negative brand effects.

I think the long-term answer for Groupon is personalization and network effects. In terms of personalization, customizing deals for consumers based on their past choices can address the consumer email overload issue as well as SMBs’ selection and branding issues. Groupon is also doing some personalization but has a lot of ground to cover (perhaps Groupon should hire some folks from Netflix’s personalization team). Network effects and scale also matter a lot. Having the largest consumer base may help Groupon draw the largest number of SMBs. This may further help Groupon offer the greatest variety of deals and will help ensure Groupon has a deal for every type of consumer. This in turn should draw more consumers.