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CouponCabin vs. Groupon

by Vyvyan Tenorio  |  Published November 17, 2011 at 3:36 PM ET
Need discounts for your holiday shopping? One Chicago online discount site offers at least 100,000 coupon offerings on any given day for thousands of stores and dozens of categories. No, not Groupon Inc. but its tiny crosstown counterpart, CouponCabin LLC, an eight-year-old player in one of the hottest Internet sectors in recent years.

CouponCabin is a minnow in a big pond, which has now grown to a surging river of coupon providers as supply keeps pace with demand. CouponCabin booked $25.6 million in revenue last year, a drop in the estimated $25.2 billion redemption bucket last year for online "couponing," as tracked by industry analyst Borrell Associates Inc. of Williamsburg, Va.

It's no match for Groupon, whose $1.6 billion in projected gross billings this year make it among the biggest fish. Though it recently cashed a $54 million equity check from Baltimore growth investor JMI Equity, CouponCabin has none of Groupon's muscular venture and institutional backers.

Yet CouponCabin boasts one thing Groupon doesn't yet have: profitability.

After painstakingly building market share and ties with merchants such as Target, Best Buy, Bloomingdale's and Nordstrom, CouponCabin is "already very profitable," says Tim Fagan, who joined the company in October from Chicago online real estate site LLC. And with the fresh capital CouponCabin plans to diversify deeper into areas such as local business, social networking sites and mobile applications.

To be sure, their business models aren't directly comparable. Groupon offers daily deals, serving as an agent for the merchants. CouponCabin provides coupon codes to apply at merchants' sites directly.

CouponCabin did have a few years' head start. The company was founded by CEO Scott Kluth, who previously worked at Sears, Roebuck and Co. Kluth developed the website but found it difficult to accomplish what he wanted. He left Sears and set up CouponCabin at a time when merchants thought coupons meant losing money on products.

Kluth bootstrapped his startup, and struggled for a while. Then in 2008, just as the global financial crisis was unfolding, the company was featured on NBC's "Today," right around the holiday season.

"Traffic exploded," says Fagan, and so did associated revenue. Kluth realized then, Fagan adds, that the scrappy coupons business could be scaled up.

About 90% of CouponCabin's revenue comes from coupon codes that customers apply to purchase items from online retail sites; the rest comes from online advertising. It concentrates on coupons from national merchants -- it now works with around 3,400 merchants through affiliate networks such as Commission Junction, LinkShare and Google Affiliate Network. For each transaction CouponCabin receives an undisclosed percentage through the networks. Fagan won't say how large a cut the company gets, but he says a typical consumer spends $100 per month on average.

What differentiates CouponCabin from others, says Fagan, is a rigorous test that a team regularly conducts to check the validity and quality of its offerings. Its closest competitor is RetailMeNot, a five-year-old Australian group that claims to be the largest online coupon site in the U.S., with 70,000 merchants. (Venture-backed coupon marketplace Whale Shark Media Inc. of Austin, Texas, bought RMN in December.)

Groupon, on the other hand, offers daily-deal discounts for local merchants. Its heft easily dominates its class though copycats are proliferating, and analysts skeptical of the outsized hype surrounding Groupon and its initial public offering Nov. 3 have had a field day heaping criticism on its management and business model.

It's hard to make Groupon's math work to get it to profitability, analysts say. It spent $466.5 million on online marketing to acquire subscribers in the nine months ended Sept. 30, filings indicate. That burn rate isn't coming down if it's adhering to the 40% annual growth through 2013 that its road show pitch projected. Shares have come off the Nov. 4 opening highs.

Still, little guys like CouponCabin have Groupon to thank. For one thing, Groupon, and close rival LivingSocial, "removed the social stigma" on coupons, says Fagan, and made it cool to tell friends about the experience.

For another, Groupon, overvalued or not, helps lift all boats on the rising tide. "People that provide savings online in an elegant way can provide real value to users at no cost and provide value to merchants," Fagan says. "For that, we applaud Groupon. We truly wish them the best."