Grouponing

UPDATE:

(9/20/10): It has been an interesting day. I had a comment come in over the weekend and then there's the negative side to this concept.

Click here for the story and follow the links to Jessie's blog too.

Here's my original post:


In case you haven't heard... here's the scoop:

The Next Web Phenom

Andrew Mason figured out how to inject hysteria into the process of bargain hunting on the Web. The result is an overnight success story called Groupon.

At least Mark Zuckerberg wrote a few lines of computer code at Harvard before he left to launch Facebook. Now Andrew Mason, a relaxed and lanky 29-year-old music major from Northwestern, has managed to build the fastest-growing company in Web history. Groupon represents what the dot-com boom was supposed to be all about: huge sales, easy profits and solid connection between bricks-and-mortar retailers and online consumers.

Groupon, a name that blends "group" and "coupon," presents an online audience with deep discounts on a product or service. Act now, says the pitch: You have only so many hours before this offer expires. That's a familiar come-on, but it's coupled with a novel element: You get the deal only if a certain number of fellow citizens buy the same thing on the same day. It's a cents-off coupon married to a Friday-after-Thanksgiving shopping frenzy.

What's in it for the vendor -- which might be a museum, a yoga studio or an ice cream shop? Exposure. Since the resulting revenue is not only discounted but shared (typically, 50/50) with Groupon, the vendor may scarcely break even on the incremental sales. But it now has customers who might never have thought of patronizing the business. Groupon gets its offers in front of eyeballs by buying ad space through Google and Facebook and via the word of mouth of its 13 million subscribers.

Unlike so many dot-com rockets, Groupon is a real business. Occupying 85,000 square feet inside a rehabbed eight-story former Montgomery Ward warehouse in Chicago's River North neighborhood, the company is on track to pass $500 million in revenue this year, according to a report Morgan Stanley put together to win some underwriting business. No technology stalwart -- including Ebay, Amazon.com, Yahoo, AOL and Google -- grew that big that fast. At just 17 months old this April, Groupon boasted a $1.35 billion valuation when it raised $135 million, the biggest chunk of it from Digital Sky Technologies, the curious Moscow investment fund behind Facebook and Zynga. (Mason will not disclose his stake, which he says is less than 50%.) The only company to reach a $1 billion valuation faster was YouTube (now part of Google), founded in 2005 and still waiting to turn its first profit. Groupon broke into the black just seven months after inception.

Mason's model is transforming the way companies -- especially smaller ones with limited marketing budgets -- snag sales. In May Groupon sold 6,561 tickets to a King Tut exhibit in New York's Times Square for $18 apiece, little more than half the list price. The campaign brought in $120,000 at virtually no marginal cost to the exhibit; Groupon pocketed about 50% for a day's effort. The most popular item so far: a $25 ticket for a Chicago architectural boat tour sold for $12. In May Groupon moved 19,822 tickets in eight hours and split the $238,000 with the tour operator.

Groupon has charged into 88 U.S. cities and 22 countries, including Turkey and Chile. Hundreds of rivals, some with deep pockets, are springing up. With turf wars brewing from New York to Brazil, Mason has armed himself with 250 salespeople and 70 writers, many plucked from the Chicago improv scene, to concoct witty pitches for deals. "We want to do for local e-commerce what Amazon did for normal consumer goods," he boasts.

Mason's entrepreneurial instincts were already stirring. At age 15 he delivered fresh bagels purchased from a bakery to his neighbors' front porches on Saturday mornings. (Candy bars, bought at Costco, proved a better seller.) After college, Mason, a self-taught computer programmer, landed a coding gig at InnerWorkings, a Chicago firm that farms out companies' printing jobs to the lowest bidder. There he hatched an idea for a website that would examine thorny topics, such as the Iraq war and health care, by unveiling the hidden agendas of the authors behind popular articles. Mason found support in 2006 at the University of Chicago, which granted him a scholarship toward a master's degree in public policy. A few months later Eric Lefkofsky, InnerWorkings' founder, caught whiff of Mason's plans and offered him $1 million of angel capital to crank up the hidden-agenda site.

The idea soon morphed into ThePoint.com, an online platform for petitioners to muster support for all sorts of causes. ThePoint launched in November 2007 and drew national press attention for its users' zany campaigns. One amassed 1,000 people committed to donating millions of dollars toward solving Africa's aids epidemic--on the condition that u2 front man Bono would retire from public life. Another corralled several thousand supporters of building a dome over Chicago to keep the city warm all year. The publicity helped lure $4.8 million in venture capital from the likes of Sand Hill Road's NEA. "I figured it was just a matter of time before I had my $400 million company and got my big payout," quips Mason.

But ThePoint didn't attract enough eyeballs to live on advertising revenue. One of Mason's lieutenants, Aaron With, proposed paying for popular Google search terms related to societal issues -- such as "make weed legal." Mason got traffic, just the wrong kind. Obnoxious fans of the band Insane Clown Posse, known as Juggalos, made ThePoint their online playground. As losses mounted in 2008, Mason trudged to With's house to lay off his friend. "If I was a rational person, I probably would have quit right there," says Mason.

One promising trend: Some of ThePoint's most effective campaigns banded consumers together to gain buying power. Mason began featuring a blog that offered readers a different deal from various vendors every day. Having little to lose, his investors encouraged him to pursue the strategy. Groupon -- then called Getyourgroupon.com -- was born.

Mason's crew of seven people each made 100 calls a day hunting for campaigns. Some days the deals would "tip" -- meaning they'd meet the minimum number of takers demanded by the vendor -- and some days they wouldn't, meaning Groupon got zilch. (Today 98% of the deals tip.) Using a 5,000-name mailing list, Groupon sold 100 $25 passes to an experience involving one hour inside a pitch-dark, soundproof tank containing skin-temperature salt water. At that point Mason knew he was on to something: "Who would think this many people would be interested in a sensory deprivation chamber?" In the next six months Groupon opened in Boston, New York and Washington, D.C., giving each city a Web page featuring its deal of the day. More than half of visitors drop in on the page because they've heard about it from friends.

Groupon's salespeople, most working in Chicago, earn salary plus commission, based on revenue and the ratio of refunds (usually negligible). Writers earn entry-level salaries commensurate with salaries of journalists, around $35,000 a year. Aaron With, now Groupon's editor in chief, oversees enough copy to fill a 190-page novel every day.

Landing a Groupon deal, even at a loss, can put a small business on the map. In March East Coast Aero Club, a flight school in Bedford, Mass., offered introductory helicopter flying lessons, normally priced at $225, for $69. The deal had to be shut down at 11 a.m. after subscribers signed up for 2,500 lessons; the club had expected perhaps 200. "I knew we had a problem when I checked in right after receiving the e-mail and 30 lessons had already been sold," recalls Philip Greenspun, the head helicopter instructor. "We look at this as incredibly effective advertising."

So effective that Mason claims Groupon now has 35,000 companies clamoring to be on its roster. Only one in eight applicants makes the cut. The winners must already be getting kudos at online review sites like Yelp, CitySearch and TripAdvisor, and the deals must offer a substantial discount from normal prices and not be similar to other promotions regularly offered by the vendor.

One problem with the Groupon model: Anyone can replicate it. More than 200 copycat sites have sprung up in the U.S., with another 500 overseas, including 100 in China. The competition isn't bashful. Many sites closely mimic Groupon's copy and graphics. One Russian site, called BigLion, ripped off Groupon right down to the fonts and colors. (While he probably has grounds for a suit, Mason says going after a startup in Russia isn't worth the effort.) In China a copycat has begun operating at www.groupon.cn, using the same graphical interface. "Groupon is looking at this as a winner-take-all situation, but they may find it tough to sustain their position in every market," says Andrew Razeghi, a marketing professor at Northwestern's Kellogg School of Management.

LivingSocial, Groupon's closest rival in the U.S., raised $40 million since launching its service in July 2009. Chief Executive Timothy O'Shaughnessy thinks his Washington, D.C. outfit has a long-term edge because it puts a full-time salesperson in each of the 50 cities it's in. Groupon has people in about half its markets. "You're dealing with a lot of small merchants whose business is their life," says O'Shaughnessy, "For them being able to work with a real person is a big deal."

Big players lurk, too, including Twitter, now with over 80 million users and 70 million tweets a day. In June Amazon.com bought Woot, a site that offers one piece of discounted merchandise a day. "This space is bound to attract somebody big; there's just too much money involved," says Lefkofsky, Groupon's largest shareholder. "We think we have a big lead."

Being the first mover has its advantages. "Groupon" is now part of the lexicon of online shopping. But Mason is protecting his flanks. To take on more small business clients, he just announced plans to feature more than one deal per day in most markets. An algorithm will mete out the offers by weighing customers' past purchases and geographic locations. A hockey fanatic from Chicago's far North Side wouldn't receive a deal for half-price yoga lessons in the city's South Side Hyde Park neighborhood.

Mason's other strategy: consolidation. In May he bought Berlin's Citydeal, a group-buying site with 600 employees serving 80 European cities (the price wasn't disclosed). Mason says he may strike again overseas but that "it's tough coming in from outside and figuring out local consumer habits."

Mason has the capital to expand -- profitably. He estimates that a metro area like Chicago should yield 20 deals a day; that implies nearly 5,000 retailers per city per year, up from the 250 in most cities now. Groupon now posts 100 deals per day in the U.S. Mason figures he can increase that number by 50 every month to reach 400 come January. Against that quadrupling of deals he plans to boost his sales staff by 80% (200 people) and his writing bullpen by 100% (70 people).

As for spending himself to perdition, as did many dot-commers before him, Mason's not sweating it: "There's never been anything -- radio, TV, newspaper, whatever -- that could generate small business sales so quickly."

Groupon is on pace to pull in $1 billion in sales faster than any company in history. This list excludes investment holding companies (which tend to be preassembled before formally launching) and those built mainly through mergers or acquisitions.

Groupon’s Greatest Hits

The best marketing pitches start with a breezy message. Here are some of Groupon’s catchiest ...

Item: Five Yoga classes at Cityoga in Indianapolis
Retail value: $71.25
Groupon price: $25
Units sold: 544
Wisecrack: "Yoga is unique in that it is the only medieval physical-fitness art that does not involve firing crossbows at a Grendel."

Item: Custom T-shirts at Little Shop of Crafts in Manhattan
Retail value: $30
Groupon price: $15
Units sold: 572
Wisecrack: "Drive mere mortals mad with the world's most obscure joke, which science has proven to be Mr. Belvedere's head superimposed on the Mona Lisa with a word balloon proclaiming, 'Everybody say, "YATTA!"'"

Item: One-hour photo session, including full-resolution photos on CD from Robert Goold Photography in San Diego
Retail value: $250
Groupon price: $59
Units sold: 898
Wisecrack: "Before photography, the only way people could preserve their most treasured memories was by forcing everyone around them to stand completely still for days at a time."

Item: Two 60-Minute Jump Passes at Sky Zone (a trampoline-filled entertainment center) in St. Louis
Retail value: $25
Groupon price: $12
Units sold: 2,228
Wisecrack: "Though it prohibits us from bench-pressing cars, gravity is the best thing for getting water out of the sky and the only thing keeping football stadiums from floating away. Escape its omnipresence with today's Groupon."

(Source: Forbes, 08/30/10)

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