Unless you have been living under a rock, you’ve probably heard of Groupon. But if their concept is unclear, here it is in a nutshell: Groupon negotiates deals with service providers and retailers, then offers those deals to its members as daily specials. Groupon members are encouraged to share the deals with friends, taking advantage of what social media advocates call “the network effect “. Companies participate because Groupon claims to push new customers towards them.

Simple, and as it turns out, very compelling for investors. Last week the company made its initial public offering (IPO), raising $700 million, the largest amount for an Internet-based company since Google made it’s IPO in 2004. But some financial analysts are skeptical, saying that Groupon will only succeed if companies continue to participate, and they will only do so if those new customers convert to loyal customers who are willing to pay full price for goods and services (i.e. they are not merely bargain hunting “bottom feeders “).

It’s an accepted truism in retail that 80% of customers usually create no more than 20% of the profit, and some customers – those “bottom feeders ” – actually cost retailers profits. It is this notion that gave rise to the idea of “firing your worst customers ” (but in 2007, two Wharton marketing professors and a grad student published a study that warned companies to hang fire; the study, entitled “Customer Value-based Management: Competitive Implications ” by Jagmohan Raju, Z. John Zhang, and Upender Subramanian showed that in a competitive environment, “firing ” unproductive customers creates an opportunity for profitable customer dissatisfaction and competitive poaching).

Groupon may or may not thrive – who knows? But whether companies continue to participate with them won’t be because they don’t like bargain hunters, especially now. With customers so focused in today’s really difficult economy on getting the best value from their purchases, any traffic may be better than no traffic. Just ask the folks at Walmart. Last year, the giant company merely opened its doors at midnight on Black Friday. Taking no chances this year, the company “leaked ” its Black Friday specials on its website on November 2, will also run a series of “Super Saturdays ” before Black Friday featuring “one day only ” special offers. Walmart wants the business.

Digital Offers: Get Used to Them

There can be no question that when money is tight, coupon clipping (or its modern digital equivalent) gains popularity with consumers. NCH Marketing Services, Inc., reported in a Jan. 20, 2011 press release that “redemption volume in the United States grew 3.1% to 3.3 billion CPG coupons in 2010… the largest coupon redemption volume growth is in the retail segment, representing 25% growth. The increasing trend in consumer use of coupons was further supported by NCH’s Consumer Survey, finding that frugal consumer shopping habits as a result of the recession continued in 2010, maintaining overall high consumer coupon use and an increasing regularity of coupon use. In 2010, the survey reveals that 78.3% regularly use coupons compared to 77% in 2009, 75.8% in 2008 and 63.6% of consumers in the pre-recession survey of 2007. “

The press release also noted that there was 37% increase in the number of digital coupon offers in 2010, compared to an overall 6.8% in the number of total coupons distributed. That’s just one clue to the digital (and most likely mobile) future that awaits consumers and retailers alike, And consider this: The San Francisco Chronicle reported on 11/6 that Google is fueling its growth on an aggressive acquisition program, noting that the company has acquired 57 companies in the first nine months of this year. The newspaper reported that, “of the company’s acquisitions this year, only 22 have been made public. Those reflect a desire to leapfrog competitors in the mobile space, particularly in local advertising and social networking. ” Google is trying to drive a transformation in how consumers connect with deals and those who offer them. For example, in August the company acquired Dealmap, a service that aggregates local deals from more than 450 sources around the country. According to the Chronicle, Dealmap attracted more than 2 million users in its first year.

Here to Stay

In RSR’s 2010 benchmark report entitled Getting Back to Good: Retail Pricing In 2010, we noted that “…going forward, a new challenge emerges: how to wean consumers off of an expectation of heavy discounts…. ” What wasn’t so clear in January 2010 when the report was published was that consumers would absolutely fall in love with smart phones and all that they can do. But that’s what happened; according to recent Morgan Stanley research data, Internet (or “smart “) phone adoption grew from about 20% at the beginning of 2010 to almost 60% by the end of that year.

One of the things that smart phones can do is to help consumers get the best price for things while they’re actually shopping for them. Part of that is finding incentives to apply to the purchase of something – just like another form of cash. That’s a behavior that Groupon and (apparently) Google want to perpetuate, and one that retailers and service providers will want continue to participate in.