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Can Groupon Grow Up?

By Jun 13, 2011

Groupon's stat sheet is pretty impressive. Two and a half years after its November 2008 launch, Groupon now numbers more than 70 million subscribers worldwide and has sold more than 46.6 million coupons, amounting to savings of $1.9 billion for its users. The brand now has a local presence in 175 markets in North America and almost 400 markets overseas; earns an estimated $100 million in revenue per month; and employs 4,500 people globally — up from 3,000 in November 2010.

Amazing. Now all the Chicago-based company has to do is reinvent itself — while scaling up to accommodate that growth.

That's because Groupon's success (and that of its closest rival, Washington, D.C.-based LivingSocial) has turned countless other players on to the potential of the “hyperlocal” marketplace, offering users large discounts on products and services tailored to their specific urban areas or neighborhoods. As a result, Groupon is defending its original turf against a slew of (by some accounts) 200 competitors ranging from start-up clones and daily-deal aggregators to niche sites covering targeted verticals, and all the way up to Facebook and Google, which tried and failed to buy Groupon for $6 billion last January.

Oh yes, for added complexity, there's also that possible Groupon IPO hanging out there later this year. After the wildly successful public offering of LinkedIn in May, investors are laying odds on whether Groupon really will open at a $25 billion valuation — or simply at a conservative $15 billion.

“It's an interesting place to work, no doubt about it,” says senior vice president of sales Darren Schwartz.

The Social Tip

For all its success, Groupon was born of a comparative failure. Founder and CEO Andrew Mason had partnered with some friends right after college to establish ThePoint.com, a website that made it easy for people to come together and work and raise funds for social causes. The site used the “tipping point” concept, and members who signed on to a cause would have to contribute time or money only if that cause reached a critical mass.

Some of those members used the site to organize their own collective-buying discounts, which didn't commit the merchant to any price discount unless the deal brought in enough buyers. And when Mason and company decided in October 2008 that ThePoint's ad model wouldn't fly, they began thinking about applying that group-buying model more broadly.

The timing was right for a discount platform that offered substantial discounts to users and relatively little risk to merchants. The recession hit hard in 2008, and local businesses saw traffic dry up or shift to big brand-name merchants who could afford to promote themselves better and stay top of mind with customers.

Some recent innovations had come along to help local merchants get noticed, such as the rise of social review networks like Yelp. But those tools were hard to manage, and a small restaurateur or salon operator didn't have time to learn.

And they might also not have the desire to coupon, for fear that those coupons wouldn't reach a wide enough market to be worth cutting into margins, or a young enough one, with Gens X and Y turning off to newspapers. Instead, Groupon (and LivingSocial in D.C.) used the online channel to sell “deals,” high-value rebates of 50% to 60% off that registered users could pay for upfront, receive in email or snail mail, and redeem up to six months or a year later.

Those merchant customers were hard to come by at first, and for Groupon they were all local to Chicago — partly because the company didn't have enough salespeople to work the big brands. But in a short time, Groupon had enough deals in the pipeline to start sending out a different local offer daily via a morning email. Location-specific Groupon sites for Boston, New York and other U.S. cities followed.

Venture capital arrived in April 2010 with a $135 million investment that allowed Groupon to purchase CityDeals, a German-based clone, in May 2010 and spread its brand to 16 European cities in a swoop. That and other purchases have landed Groupon, either in branded form or as an owner, in 40 countries around the world, including Hong Kong, Singapore, Taiwan, the Philippines and the United Arab Emirates; it is also in a collaboration with Chinese social deals site Tencent.com.

The looming IPO has fogged estimates of Groupon's annual revenue; estimates ranged from $2 billion in 2010 down to $500 million before settling in the $800 million range. While the company doesn't release revenue figures, a reputable estimate published in the TechCrunch blog found that the company had monthly revenue in February of $103 million, up from about $92 million in January.

Another complaint sometimes heard in merchant and business forums online is that the customers brought in by a Groupon deal are price loyalists not likely to return for full price. Schwartz says Groupon is working on systems to track return frequency. But clients can now use Groupon tools — such as an iPhone merchant app that scans in the Groupon code and the total bill — to track overspend, or the difference between the Groupon price and the customer's actual spending in-store. That excess runs 30% over the cost of the Groupon, says Brown — more in restaurants, where users can buy alcohol.

Brown says Groupon is adding national brands to its mix where the offer brings the company into a new category or adds real value for users. He points to a February deal in the Chicago market that offered $70 off a round trip on Virgin's new routes to San Francisco or Los Angeles for $7, which sold 3,000 vouchers in less than 30 minutes.

Story Continued on Next Page: Buyer/Seller Behavior, Marketing, National Interest in Local Deals, Groupon Now >>

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Buyers and Sellers

Groupon's inventory is local deals, and the emphasis is on both those words. The company is about local discovery: “finding great things to do nearby,” says Schwartz. Mason himself has compared Groupon in press interviews to city guides with large daily readership like Daily Candy or Thrillist, “only with this added mechanism of a great deal.” Toward that end, Groupon's large sales force of about 1,000 in the Chicago HQ and almost as many on the streets of its local markets are determined to find deals that will interest, surprise and delight readers. Restaurants, salons and spas are there, yes; but so are classes in belly-dancing, glass-blowing and sky-diving.

“As we grow, we're expanding the types of deals you can find on Groupon,” Schwartz says. “But at the end of the day, we're still about the fun stuff.”

That fun is baked into the company culture. Groupon's daily emails are noted for their wry humor and occasional weirdness. Customers are anxious enough to open those messages that Groupon now sells, on average, 50,000 deals before 8 a.m. across its network every day. “We're changing routines, getting our subscribers to contemplate an impulse buy first thing in the morning,” says Lee Brown, senior vice president of national sales. “We're surfacing new ways for people to try new things.”

Of course Groupon's success depends on proving value to merchants too, and the company's stupendous growth rate has on occasion undercut its mission to satisfy that constituency. Specifically, stories began to circulate about merchants being overwhelmed by traffic from Groupon buyers.

“Because of the accelerated pace of our growth at that time, when we signed deals with merchants we didn't have real throttling or deal caps in place,” says Brown. “Now we have limited quantities for these local merchants. They tell us what they can provide in the way of supply, and we go out and create the demand for it.”

Since many of the merchants Groupon deals with are unaccustomed to online marketing and sometimes to marketing of any kind, Groupon routinely provides advice on capacity, deal expiration and other limits, and price points. The company has also begun to introduce a white-glove “merchant manager” service that helps the business ramp up to the feature and communicates metrics to the merchant even a year after the deal has rolled out.

“Instead of just sending a lot of customers to a business, we want to send the right amount of customers, and the right kind, to our clients,” says Schwartz. “That's the win-win-win we want.”

Another complaint sometimes heard in merchant and business forums online is that the customers brought in by a Groupon deal are price loyalists not likely to return for full price. Schwartz says Groupon is working on systems to track return frequency. But clients can now use Groupon tools — such as an iPhone merchant app that scans in the Groupon code and the total bill — to track overspend, or the difference between the Groupon price and the customer's actual spending in-store. That excess runs 30% over the cost of the Groupon, says Brown — more in restaurants, where users can buy alcohol.

National Interest in Local Deals

One issue facing Groupon as it grows is striking a balance between local discovery and national promotions of big brands. The platform proved it could mobilize its subscribers behind a nationwide daily deal last August, when a $25 deal for $50 in merchandise at The Gap sold 445,000 Groupons in a matter of hours — at one point right after the deal broke selling 10 Groupons per second. Since then, Groupon has done similar national deals with American Apparel, Lucky Brand and Barnes & Noble, among other big names.

Brown says Groupon is adding national brands to its mix where the offer brings the company into a new category or adds real value for users. He points to a February deal in the Chicago market that offered $70 off a round trip on Virgin's new routes to San Francisco or Los Angeles for $7, which sold 3,000 vouchers in less than 30 minutes.

CPG maker General Mills tested another opportunity with Groupon in April, offering a $40 basket of items, including some new products, a book of in-store coupons and free shipping, for $20 to subscribers in the Minneapolis and San Francisco markets. The 5,000-deal offer sold out in both cities within half a day. Brown says Groupon will also explore selling direct-to-consumer goods baskets in other verticals such as baby care and beauty.

How can Groupon add these national brands without blurring its local-discovery mission? One answer might be channels added to the local Groupon sites. Brown says a channel for home and garden deals tested on the Chicago site has now spread to 20 markets, and intersperses offers from the big national players among deals from local independent garden centers.

The Real-time Deal

Another growth issue for Groupon is its basic format: pushing out one Daily Deal per market per day with a 24-hour buy life and a long redemption period. That has created a backlog of merchants who want to work with Groupon, and it doesn't take advantage of the device most users take with them on their local explorations: their mobile phone.

Groupon is testing Groupon Now, an expansion of its smartphone app that lets users discover deals in everything from food and beverage to services, entertainment, classes and attractions within blocks of their current location — all timed to be bought and redeemed in a window of hours, not months. The company recently launched Groupon Now in its Chicago market with a highly promoted $1 offer on all the deals in all the categories — thereby one-upping rival LivingSocial, which in April ran a $1 lunch-only promotion to unveil a real-time deal service in its home market.

The promotion sold “many thousands of deals,” say Dan Roarty, VP for Groupon Now. Groupon Now is intended to be something of a self-service platform in which merchants can set up deals on the fly — for a rainy Tuesday lunch daypart, for example — including deal caps and time limits that they see fit. While Daily Deals might be about enticing new customers, the Groupon Now deals are also about using inventory — whether lunchtime food or unused mani-pedi appointments — that would be wasted otherwise.

In late May, Groupon inked a deal with Live Nation that should add Ticketmaster live entertainment to that Groupon Now mix of real-time deals, offering rebates on arena seats for local shows that have not sold out.

A strong location-based mobile platform isn't all Groupon is looking at for future growth. The company recently acquired Pelago, inventor of the Whrrl social network, and put its founder and CEO Jeff Holden in charge of product development. That has given rise to guesses that the next Groupon move will have a bent toward social sharing, personalization or both.

“At Pelago we created the idea of societies based on people's interests and passions where members curate the world, surfacing recommendations they found interesting and valuable in a game-based environment,” says Holden, who also spent years as senior vice president of consumer websites at Amazon. “Groupon has created a deal economy, and [Pelago] created an idea economy. These two things are on a collision course, and they belong together.”

As consumer spending on daily deals continues to climb — to anywhere from $2.2 billion to as much as $3.9 billion in 2015, according to local media firm BIA/Kelsey — folding both mobile and social into its offering might be what lets Groupon stand its ground against rivals like Facebook and Google.

TIMELINE

  • OCTOBER 2008: CEO Andrew Mason and company launch Groupon in Chicago from components of a social-advocacy start-up that used “deal tipping” to support causes. Early deals reportedly needed as many as 10 buyers to tip — and some didn't. Today 98% of Groupon's deals reach their sales goals.

  • MAY 2010: Groupon uses its first infusion of venture capital to buy a German copycat, adding 16 European cities to its 175 North American markets.

  • AUGUST 2010: Groupon rolls out first daily deal for a national brand, The Gap, and sells 445,000 in hours. Forbes headlines Groupon “the fastest growing company ever” with a valuation of $1.5 billion.

  • DECEMBER 2010: Company spurns a reputed $6 billion acquisition by Google and reportedly starts strategizing a 2011 IPO.

  • MARCH 2010: Groupon and rival LivingSocial start testing short-term deals via mobile. Groupon's service rolls out in Chicago in May, with other major metros planned.

  • APRIL 2010: Groupon buys Pelago, which runs the Whrrl social network. At press time, still considering whether and when to make a public offering.