What Groupon Can Teach Us About Shopping and the Web

1Executive Summary

There are plenty of red-hot, rocket-fueled online startups — and then there is Groupon, which is growing faster than virtually any other tech-related company in history (including Google and Facebook). It’s 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 in 2008, 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 eBay, Amazon and Google 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.

Deceptively Simple

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. If not enough do so, the discount is withdrawn; if enough people accept, everyone gets a deal until the offer is over or the merchandise is gone.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 — is key to Groupon’s success, and helps spread the word even faster to broaden a retailer’s potential reach. Some retailers have reported hundreds of shoppers showing up at their locations within hours of a deal being sent out to Groupon’s network.

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, Groupon 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. Online payment giant PayPal, meanwhile, is close to launching a “social shopping” service called Shoptimist.

The Secret: Making Shopping Social

Other companies have tried the digital coupon or emailed discount offer before. In fact, there are dozens of previous efforts (such as Coupons.com). But it wasn’t until Groupon came along that it became obvious how powerful the group-buying phenomenon could be when combined with social tools such as email, Twitter and Facebook.

The company originally started as The Point. It was designed to help people find others who were interested in the same social causes and coordinate efforts around issues. But co-founder 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.

Groupon’s success has convinced cofounder Lefkofsky, who has started a $100 million 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 Downside

Not everyone, however, 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 discount, and found themselves cleaned out of inventory or actually taking a loss on an offer. 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.” 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.

The Lessons:

As Groupon tries to grow large enough and quickly enough to continue to fend off competitors such as WalMart and Facebook, it’s worth looking at what other companies, and in particular, those who offer retail services, can learn from the company’s incredible growth. Here are just a few lessons:

  • Social shopping is a real phenomenon. Groupon’s success and the arrival of mainstream competitors such as WalMart shows that social shopping is more than just a fad; plenty of people want to participate in it. How can you build that into what your company does?
  • Making activities 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?
  • 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 a social element is going to affect the other parts of your business, and take steps to deal with potential problems, such as losing money on a sale.
  • 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.

Obviously, not every company that adds a social component — or a social shopping component — to their business is going to achieve the kind of runaway success that Groupon has had. But the speed with which the company has been able to capitalize on a relatively simple marketing model should be a sign that it isn’t out of the realm of possibility for others to emulate.

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