The ads are everywhere. You see them on your Facebook page, on video streaming sites like YouTube, on pretty much any website you can imagine, and now they are on TV. It seems, at least to me, that Groupon came out of nowhere, and came out full force with an aggressive marketing campaign that would ensure visibility. In the past few weeks of researching Groupon, I have found this campaign to have worked as the company has become so popular and successful that it turned down a $6 billion offer from Google. Not the kind of offer just any company would turn down, especially one as new as Groupon.

However, with the way the site is taking off, it seems like the 30-year old CEO of Groupon, Andrew Mason, made a wise gamble.

The concept of Groupon seems like a no-brainer. The website offers its users at least one deal a day in their respective cities. Deals can include anything from haircare services at a salon and picture enlargements at a camera shop, to organic seafood and drinks at a local restaurant and home cleaning from a cleaning service. The key principle that sets Groupon apart from other sites like Living Social and Tenka is their unique business model that combines group buying with coupons. Users can vote on potential deals that merchants have offered to Groupon. If a certain number of people vote for it, that deal becomes available to everybody and the company splits the revenue with the merchant 50/50 while the customer gets a great deal that he or she has helped make happen. If not enough people vote on the deal, however, the deal is void and not available to anyone, regardless if they voted for it or not.

According to Mason, “what we’re trying to do is fundamentally change the way that people buy from local businesses in the same way that e-commerce has changed the way that people buy products. We want to have that same kind of transformative effect on the way the [people] think about buying locally”.  Small, local businesses are able to get an incredible advertising boost that they would not normally obtain from marketing in newspapers or on the radio. For example, if a new take-out restaurant wanted to advertise on the internet, they would have to pay for the ads and lose control over them. With Groupon, they are able to easily negotiate with the site on a compromised deal that would bring in many more customers than an ad that is only featured on a few sites. The business pays nothing for its deal to be seen on Groupon and its content is seen by local users who are more likely to visit the establishment.

For the most part, the merchant has a successful relationship with the site. However, getting on the site is one of the hardest parts. Mason explains that the company passes on about 7 out of every 8 offers they receive. Furthermore, a business that had been slow to grow in the past might not be able to handle the extreme amount of new customers that come in and become overwhelmed. Moreover, a study done by the Wall Street Journal that polled 150 merchants who had placed deals on the website, revealed that restaurants might have a harder time than other places. For example, many of the people who use Groupon are bargain shoppers looking for deals and might not tip as well in a restaurant. This leaves the restaurant with too many customers, and low-tipping ones at that.

This was the case for Jessie Burke, who owns a small café. The deal she made with Groupon was $13 worth of food for $6. But then she was told that if the deal was under $10, Groupon gets 100% of the revenue and the merchant gets the advertising. She eventually agreed to a 50/50 agreement, but since there was no cap on the deal, more than 1,000 deals were sold and she found herself $8,000 poorer than when she started.

However, this is one of the potential risks in gambling with a site like Groupon, and Mason says that most merchants are satisfied with the amount of new customers who come in. The company is considering capping the deals for the merchants to prevent too many customers from using the coupon, but he explains most merchants they work with are excited that the only problem they have is too many customers.

Also, cases like what happened with Jessie Burke are rare, considering most of the people I polled only use Groupon about once a month, hardly enough to overwhelm a ton of small businesses to the point of bankruptcy. I surveyed NYU students over the age of 18 and most of their experiences with Groupon have been positive and preferred it over other sites like Tenka.

As for the major appeal of Groupon, it varies. One student I surveyed was impressed by how helpful it was to find good deals nearby and used the site to give a family member a gift. Another student explained “they interact with me during the coupon process through the votes which allows me to think I am an integral part of Groupon”.

Others, though, had slight issues they felt could be resolved with the site. A few people told me they subscribe to the site just in case an interesting deal comes along but do not use it often. Another person was hesitant about relying on other people to follow through on a discount that might not be interesting to enough people.

Most of the people in the survey explained that the deal they are most likely to vote on would be for a restaurant. One person suggested that even if the target number for the deal is not met, Groupon could make a minor discount, rather than none at all. Another student explained that the website could do better at personalizing the deals and let the users choose what kinds of deals they get, rather than ones that are all over the place and might not interest them. Another person suggested adding a Facebook or Twitter aspect to personalize the site even more. This is something that one of Groupon’s major competitors, Tenka, has been able to do and it has provided them with much success.

Mason says he takes suggestions like these into strong consideration to stay competitive and explained how Groupon is beginning to personalize the site more. The site is now integrating variables such as gender, neighborhood, and buying history to customize the deals that come up on a particular screen for users. According to Mason, “that allows us to preserve what feels like the same Groupon experience for customers, while at the same time giving a more relevant experience and serving far more merchants than we would otherwise”.

Aside from a few mishaps, it seems that Groupon is quickly becoming a hit with the merchants it works with and the customers it services. Mason continues to focus on constantly improving his booming company and exclaims “you’ve got to go out there and kill what you’re going to eat”. Customers and merchants are not the only ones saving and making money either. Forbes estimates that the company is on track to make $1 billion in sales faster than any business has ever done before. Living Social may have accepted a $175 million investment from Amazon, but if the projected sales figures are correct, the $6 billion offered by Google will look like chump change for Mason and his bursting company very soon.

2 Responses to “The Groupon Revolution”

  1. David Lee says:

    Very interesting article. As a staff at Tenka, I would like to understand how the study was done more in detail on this part. “I surveyed NYU students over the age of 18 and most of their experiences with Groupon have been positive and preferred it over other sites like Tenka.”
    What type of questions have been asked? Was there any reason why they prefer Groupon over Tenka? How many students participated in the study?
    Also wanted to make a correction that Google actually offered $6 billion, not the million.

  2. mdeseriis says:

    Andrew, thank you for this insightful travelogue on Groupon. You do a very good job in showing how the deals can be advantageous to Groupon, the shoppers, and the merchants while warning the reader that they may not be advantageous or profitable to anyone. I personally think that the lack of social features is a serious limitation to the GroupOn model, and that group-buying sites such as Tenka and LivingSocial have the advantage of integrating social and viral marketing functionalities that make any shopper a potential co-promoter of the deal. On a methodological level your travelogue has a major limitation, namely the fact that you do not quote any of your sources by name. While the quotes from GroupOn’s CEO are taken from secondary sources (something that you should make clear with a link to the originating source) the students you interviewed have no name so it is possible for anyone (such as the user above) to question the reliability of your findings. This is particularly true of a non-sensitive topic such as group buying, where I do not really see why users would want to remain anonymous.

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