All the attention on Groupon’s new financing round got me interested in their growth potential. Now, I have no special insight into the Groupon model, but here are some back-of-the-envelope calculations.

The value to an advertiser aside, the thing that strikes me about Groupon is how modest local deals can multiply into a giant business if the model is replicated across the country.

First, the average deal. This recent answer on Quora estimates the average price at $40 and the average number of sales at 2,500. I looked at the deals on in a few cities today and that seems a bit high. For example, Seattle’s deal is $10 and 226 people have bought by late afternoon. Chicago’s deal is $150 and 395 people have bought. Perhaps I’m just seeing the holiday lull.

These slides give stats for 108 deals with an average price of $22 and average sales of 3800+. Not sure on the reliability here either, but these numbers are close enough for comfort, so I’ll go with $40/2500.

From their website it seems that Groupon is currently operating in 181 cities, so our estimate of 2500 sales per city gives 452,500 sales nationwide in a single day.

We can sanity check these numbers using the traffic to groupon.com. Compete estimates this at 22.8M visits in November.

To reach 452,500 sales per day they would need a conversion rate of 60%. I have no insider experience with group buying, but based on other web conversion rates that I have seen this seems crazy high. By way of comparison, typical CPA conversions are low single digit percentages in my experience.

The other sanity check we can do is against the revenue estimates that are floating around. 2500 sales at an average of $40 across 181 cities yields revenue of $18.1M in a single day, and more than half a billion dollars in November.

The WSJ reported recently that the revenue for 2010 was actually $2B. Given Groupon’s growth trajectory over the year, this lines up reasonably well with the $540M estimate for November. Dividing revenue proportionately over the year based on Compete’s monthly traffic estimates gives November $368M of the $2B.

So according to the traffic sanity check, the $40/2500 average deal looks questionable. On the other hand, it looks reasonable according to the revenue estimate. In any event, sticking to $40/2500, all this guesstimation gets us to an average monthly revenue of around $3M per city.

Back to the original question: How does Groupon grow?

Two things they are already doing are side deals (each city has a few on the sidebar in addition to the main daily deal) and the Groupon store. But the obvious growth path seems to be to offer daily deals for more zip codes by expanding out of the major centers and getting more granular in their current geographies. Here in Seattle I’m sure that there is scope to go from one location to 10 or more, for example.

Of course, the deal economics will get more marginal as the geographies get smaller and further away from the centers. At some point the deals won’t support the salary of the account executive that is setting them up.

There are around 40,000 zip codes in the US today. How many of those are viable to Groupon? Even if 1 out of 10 can support a deal, and even if the deals are half the size and sell to half the number of people, this still represents an opportunity for 5x growth.

If some pundits are right and the existing markets are far from saturated, then it could be a lot higher. Of course, there are low barriers to entry and Groupon has to beat a flood of new entrants to these zip codes. Maybe that’s one of the things that makes this new round of funding so important.