There are red-hot, rocket-fueled online startups — and then there is Groupon. While plenty of other web-based companies are growing fairly rapidly, Groupon is said to be growing faster than virtually any tech-related company in history (including Google and Facebook), and is expected to close the year with revenue of more than $500 million, an incredible amount of money for a company that is barely two years old. Started by Chicago entrepreneur Andrew Mason, Groupon now has almost 1,000 employees and operates in over 300 cities in the U.S., as well as several other countries.
Not surprisingly, given this incredible growth, the company has been the subject of rumors that see Google, eBay, Amazon or some other giant acquiring it for as much as $3 billion. Groupon is also reportedly looking for new financing, after already having raised more than $170 million in several rounds of funding.
Making the coupon digital
The secret to all of this success isn’t some kind of radical new technology or device — in fact, it’s deceptively simple: Groupon has simply modernized the traditional store coupon, which it distributes to members via email. Stores, restaurants and other merchants can offer deals and discounts to their customers, and those deals are dependent on a certain number of people signing up (hence the company’s name). If not enough do so, the discount is withdrawn — but if enough people accept, then everyone gets a deal until the offer is over or the merchandise is gone. Groupon gets as much as 50 percent of the revenue from each deal.
The viral aspect of these deals — in which users pass them on to friends and acquaintances, hoping that they can gather enough people to trigger the discount — makes them an incredibly powerful tool for retailers, and the distribution that email and the web provide helps spread the news even faster. Some retailers have reported hundreds of shoppers showing up at their locations within hours of a deal being sent out to Groupon’s network. More on that a little later.
The downside
Not everyone is enthusiastic about the effect that Groupon can have on their business. In several high-profile cases, retailers have become overwhelmed by the number of customers coming in for discounts and found themselves cleaned out of inventory or actually taking a loss on an offer — but many observers have put this down to inexperience on the part of the retailer in terms of projecting demand, or their ability to fill that demand. For the most part, Groupon says merchants love its deals, and most advertisers sign up for repeat offers once they have a chance to try the system out.
One small business owner recently wrote in the New York Times about doing the math on a Groupon deal and described it as “a beast — a beast that can propel your business or smother it. It depends on your business.” Offering discounts via the service is just the same as advertising, this owner says: “It costs money. Instead of writing a check for an ad, you are choosing to lose money on sales.” In effect, he says, each business owner has to make assumptions about how many groupons will be redeemed and for how much, and then figure out if they can live with that.
Success breeds competition
The success of Groupon, not surprisingly, has also brought forth an explosion of competitors. These include some national competitors such as LivingSocial and Buy With Me, as well as local versions in dozens of major markets, both in the U.S. and internationally — where Groupon has expanded in part by buying local competitors in Russia and Japan. One company called Tippr offers a white-label group-buying platform that companies and publishers can use to run their own offers at a cheaper rate than Groupon charges.
On top of that, the company has been getting competition from both real-world giants such as Walmart (which recently launched a Facebook-based group-buying effort called CrowdSavers) and from online players such as Facebook — which has been experimenting with offers tied to “check ins” via its Facebook Places feature — and soon from online payment giant PayPal, which is close to launching a “social shopping” service called Shoptimist.
The secret: making shopping social
Groupon started as a company called The Point, which was designed to help people find others who were interested in the same social causes and co-ordinate efforts around issues. But cofounder and original angel investor Eric Lefkofsky said in a recent interview that the key to the company’s runaway success was when it combined shopping discounts with the social element that gave the company its name. Giving people a tangible reward — namely, money off merchandise or meals, services, and so on — combined with the incentive to get others involved in order to trigger that reward was the magic recipe for Groupon.
Other companies have tried the digital coupon or emailed discount offer before — in fact, there are dozens of them. But it wasn’t until Groupon came along that it became obvious how powerful this could be when combined with social tools such as email, Twitter and Facebook. And that success has convinced cofounder Lefkofsky, who has started an investment fund, that the use of social tools is the future of almost every business, particularly those with an online component. “We think that the most disruptive business models will take advantage of that social graph over the next five to 10 years,” he told the New York Times.
The lessons:
While Groupon tries to grow large enough that it can fend off competitors such as Walmart and Facebook, it’s worth looking at what other companies can learn from its incredible growth. Here are just a few:
** Social shopping is a real phenomenon: Groupon’s success and the arrival of mainstream competitors such as Walmart shows that this is more than just a fad, and that social shopping is something plenty of people want to participate in. How can you build that into what your company does?
** Making things social accelerates engagement: As Lefkofsky points out, the idea behind the company’s service didn’t really take off until it combined shopping and being social. How can you add social elements to your product or service, to encourage people to share their experiences or their interest in it? Give people a chance to be social and they will take it.
** Being social requires planning: One of the biggest lessons that online businesses can learn from Groupon’s critics is that being social can’t be an add-on to what you are doing — you have to think about how it is going to affect the other parts of your business, and take steps to deal with the potential fallout.
** Anyone can do it: As Groupon is discovering, the addition of social features to what is effectively the digital version of traditional coupons is not difficult. In other words, there is virtually no barrier to entry except for size and scale. If you aren’t doing it, one of your competitors probably is, or is thinking about it — and if they get the scale, you could be left on the outside looking in.