Groupon’s $6 Billion Gambler By BARI WEISS
The 30-year-old CEO in Chicago is changing the way we buy from local businesses. And trying to make billions doing it.
Enter the offices of Groupon, the hottest Internet start-up in the country, and staring down at you from the wall is 30-year-old CEO Andrew Mason. He's on the cover of Forbes Magazine labelled "The Next Web Phenom." On the wall surrounding the glossy are eight other covers trumpeting other one-time start-up superstars: Steve Case of AOL, Sean Parker of Napster, Jonathan Abrams of Friendster, Chris DeWolfe and Tom Anderson of Myspace, and more. Where are they now?
The boyish entrepreneur has reason to be. For every wunderkind tech titan, there's a burnt-out prodigy. Mark Zuckerberg is Time's Person of the Year, and Facebook may be worth more than $40 billion. But few outside Silicon Valley know of Mr. Abrams or Friendster, which was the hottest social-networking site when Google tried to buy it in 2003.
Mr. Mason is lately in the news for reportedly turning down a $6 billion buyout offer from Google—almost double the search giant's most expensive acquisition to date. It's a bet that Groupon, his two-year-old website that's making the coupon hip and ubiquitous, will be the Next Big Thing.
The basic idea is simple: The site offers subscribers (44 million and counting) at least one deal a day in their city—say, half-off for sushi dinner or a spa treatment. But Groupon's innovation is the collective buying model suggested by its name: group plus coupon. A certain number of people need to buy into any given deal before it kicks in, or "tips" in Groupon parlance. Once the deal tips—for example, 200 people have purchased a $40 coupon for an $80 massage—the merchant and Groupon split the revenue roughly 50/50, and a group of customers has an unbeatable bargain.
"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," says Mr. Mason. So it's like Amazon for small businesses? "We want to have that same kind of transformative effect on the way that [people] think about buying locally."
Arguably the biggest winner in all this is the local business. Until Groupon came along, a small business—say, an independent yoga studio—was generally confined to advertising in newspapers, on the radio and online. Those types of ads have two disadvantages for merchants: They have to pay for them, and they have no real control over who sees them.
Groupon fixes those problems. First, it's free. It costs that yoga studio nothing to get on Groupon and be seen by its legions. Second, it also makes sure that the deal for a half-off class is seen by the right consumers.
But that's only if the yoga studio makes the cut. At this point, says Mr. Mason, Groupon has so many requests from businesses "that we have to pass on seven out of eight merchants that contact us."
In December 2008, Groupon had 400 subscribers. That means that the site has grown by a factor of 110,000 in two years. The company added three million subscribers alone in the week following the rumored Google acquisition earlier this month. And Groupon's average subscriber is a marketer's dream: She's between the ages of 18-34, single, and there's a good chance she makes more than $70,000 a year.
The bottom line: If Groupon's gambit is successful, then the $6 billion Google reportedly offered the start-up will ultimately look like bubkes.
Walk around the company's headquarters in downtown Chicago and it feels like the fastest growing company in history. (According to Forbes, it is, based on a study projecting that the company is on pace to make $1 billion in sales faster than any other business, ever). The sixth floor of the old Montgomery Ward building is set up like a scrubbed-up newsroom: no walls, row upon row of shiny white desks, a live video feed to the Palo Alto satellite office. The employees look like they've stepped out of a J. Crew ad: perky, good-looking and young (average age: 25). Mr. Mason's desk, no different from any other, is in the middle of the hubbub.
At other hot start-ups like Facebook and Twitter, the whiz kids are the computer programmers. At Groupon, they are the savvy sales representatives. An army of 20-somethings works the phones and Macbooks to build relationships with the most desirable local businesses in 375 American cities and 35 countries. Just this week the company broke into 10 cities, including Kalamazoo, Mich., and Harrisburg, Pa.
Mr. Mason demurs when I ask him how the company breaks into new markets—it's the "secret sauce," he says. But conversations with other Groupon employees reveal at least this much: When there's an untapped market, salespeople have a few weeks of lead time to do research in the area. The company won't reach out to just any business: It must have a certain number of outstanding reviews on sites like Yelp. While salespeople explain the model, the marketing team spreads the word that Groupon is coming to town, especially via sites like Facebook.
The company also relies on "fanatical" customer care. "We have a policy called 'The Groupon Promise' that any customer can return a Groupon, no questions asked—even if they used it—if they feel like Groupon has let them down," Mr. Mason says. The Chicago office maintains a 24-hour-a-day hotline so that any customer—confused, disgruntled or otherwise—can call and speak directly to a human being.
Maybe even a funny one: Many of those who answer the phones, and who write the text of Groupon's deals, are plucked from Chicago's legendary improv-comedy scene. A skydiving deal from this week opened with: "Skydiving is the perfect way to celebrate a birthday, sweat out premarital terror for a bachelor or bachelorette party, or take a glorious leap into a new life as a migratory swallow."
Irreverence is part of daily life in the downtown office. Last Wednesday, someone brought a monkey dressed in a Santa suit. This past summer, Mr. Mason paid a male actor to strut around the office in a tutu for a week—totally mute. Less outrageously, the company has no dress code and no vacation policy, which Mr. Mason credits to Netflix.
"The way people think about jobs, the nine to five . . . it's the same routine over and over again," he says. "Groupon as a company—it's built into the business model—is about surprise. A new deal that surprises you every day. We've carried that over to our brand, in the writing and the marketing that we do, and in the internal corporate culture."
Like so many other successful tech ventures, Groupon grew out of an earlier, less successful idea. ThePoint.org was a website for organizing campaigns like protests or fund-raising drives. And, like Groupon, it was built around the tipping point concept: The campaign was only carried out if enough people committed.
But ThePoint never took off. "The big problem with ThePoint is that it's this huge, abstract idea. You can use this platform to do anything from boycotting a multinational company to getting 20% off a subscription to the Economist," says Mr. Mason, who dropped out of the University of Chicago's master's program in public policy to build ThePoint with $1 million investment from Eric Lefkofsky, a former boss and serial investor who later helped found Groupon.
One lesson Mr. Mason learned is that for a site to be successful, it needs to be simple and easy to use. ThePoint, says Mr. Mason "was overly complex and we needed to pick . . . one application of the larger abstract idea and execute it really, really well."
Another was a broader lesson about the nature of do-gooder ventures. "One of the things I realized . . . is how few success stories there are in websites or products or businesses that exist primarily for an altruistic purpose. Most of the time, the things that really change the world exist for something fundamentally selfish and then the world-changing ends up being a side-effect of that. Whether its Facebook, Flickr, YouTube or Twitter, all those things have made the world better by the way that they allow people to share information. But that's not why they were created. It was so they could share pictures and videos of scantily clad women or kittens or whatever. And Groupon's the same way. And it caught me by surprise."
In the early days, many deals didn't tip. No longer. Groupon now promotes some 650 deals each day and more than 95% of those tip. Upwards of 26 million Groupons have been purchased world-wide, saving customers in the U.S. $850 million.
Most of the time, the deals are for services: museums, spas, bars, salons and restaurants. Sometimes they transform a business in 24 hours. The Joffrey Ballet is one such example. On Aug. 18, 2,338 people bought highly discounted subscriptions to the company's upcoming performances, doubling the ballet's subscription base for the season in a single day.
They can be too successful. The 445,000 coupons sold to the GAP (it was a national deal; $25 for $50 worth of merchandise) crashed the clothing chain's server. Not a big problem, since it's a major company. But when a nail salon or cafe is suddenly flooded with thousands of customers and those customers don't have a good experience, the deal may harm the business.
Groupon works closely with its merchants to prepare them for the onslaught, sometimes even suggesting capping the deal. "We have so many customers that our biggest problem is that sometimes we overwhelm merchants with the number of customers we bring them."
It's a good problem to have and it's leading Groupon to constantly update its offerings according to a strategy informally called Groupon 2.0. The plan starts with personalizing the deals subscribers see.
Each user still sees the deal of the day, but Groupon has begun using variables like gender, neighborhood and buying history to decide what deal comes up on a particular screen. "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 could otherwise," explains Mr. Mason.
Then there's Groupon Stores. "What we've just recently started testing in Chicago, Dallas and Seattle is allowing merchants to create their own deals," says Mr. Mason. "Any merchant can create a deal and send it out to their own audience" without Groupon employees vetting the specific deal, say 20% off a particular brand of jeans at Nordstrom Rack. While Groupon gets a percentage, it's sometimes as low as 10%.
They can also, crucially, post it to a page of their own on the Groupon site. That way, they reach large numbers of potential customers without having to be selected as the Deal of the Day or reach a tipping point.
Groupon Stores allows Groupon to bring in "more merchants so that we can get more deal-flow into the system." As it brings in more and more merchants, the company moves closer to becoming a clearinghouse for local businesses.
Groupon's inability to handle the businesses banging on its door, says Mr. Mason, has led to the proliferation of clones. He estimates that there are some 500; many have ripped off Groupon down to the company's bright green signature color and website layout. But only Living Social, which just received a $175 million investment from Amazon, has emerged as a genuine competitor. Groupon still maintains about 80% market share. Losing to a competitor, perhaps one that doesn't exist yet, is one way the company could fall.
There's also the possibility that Groupon has taken off in the middle of a new tech bubble. Some analysts argue that social-networking sites are overvalued—Groupon included. Twitter, for example, is now valued at $3.7 billion by investors including Kleiner Perkins, even though it will reportedly earn roughly $50 million in ad revenue in 2010.
For now, the Pittsburgh native is trying to stay grounded amid new fame and wealth, which he says is "totally weird." Most of all, he's trying to maintain single-minded focus on his exploding company. "You've got to go out there and kill what you're going to eat."
Ms. Weiss is an assistant editorial features editor at the Journal.