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Group on

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Submitted By Jeanne
Words 1961
Pages 8
JUNE 17, 2011
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Groupon
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and the Collective Buying Phenomenon
Jeanne Wallace

What’s the big deal? Never knew that question could amount to so much. Now, everyday when I log into my email I’m face-to-face with a marketing concept that answers the question for me: Groupon.com. The site offers daily deals of “the best stuff to do, see, eat, and buy” in my city. Each deal is designed in a tempting, humorous, and creative way. Sometimes, I bite at first site. Average savings per deal equals 60%! Often the deal is something I’ve thought about | | trying and never seized the chance. Timing, | Groupon Deal: For $12, you get $24 worth of fresh, in-stock cakes at Larsen's Bakery in Racine. | savings, and the opportunity to try new things with others are triggers that make it easy for the finger to click on “buy”. Daily deals have become an Internet frenzy driven by Groupon. Let’s find out how and why this marketing concept has caught on.

The concept of collective buying
In the late 90’s, MobShop.com was a group-buying site where consumers could add might to their buying power by coming together as a group. The site was mainly built to gather enough customers to have the purchase power to drive a price down on electronics or video games, as an example. It was a great idea at the time, however, MobShop discovered that it took too much time to get people on board for the deal. Many did not want to wait. The customer base was too diverse. Often, the deal fell apart.

ThePoint.com shared a similar collective approach. However, its focus was on raising money, organizing people, working for change, and basically anything that required mass participation. Figure 1 describes an example of a campaign sponsored through ThePoint. Andrew Mason was the force behind ThePoint. Andrew Mason was living and working in Chicago.
His parents came for a visit and to take in some sights. |
Figure 1. Richard Sitler posted this request on ThePoint to join him in raising $10,000 to fund his photographic documentary of Peace Corps volunteers in the field to “…show the world why the Peace Corps exists and how it is working to change the world.” |
While taking an architectural boat tour in Chicago, Andrew realized that after living in Chicago for ten years, there was much of the city he had never experienced. A lightbulb went off. What about making a list of the best things to do in the city, figure out how to make it affordable to do these things, and experience the city with others. He thought about lessons learned and mistakes made in the collective buying model employed by MobShop and asked the question, “How can we (ThePoint) use it to solve a real problem?” The answer came to him and the concept of Groupon was conceived in September of 2008.

The birth of Groupon.com
Armed with his new focus, Andrew caught the attention of an investor by the name of Eric Lefkofsky who saw the commercial potential of ThePoint.com. Mr. Lefkofsky wanted to know how to use the site to make money. Through advertising? Fundraising? Collective buying? The last choice struck a chord and Mr. Lefkofsky backed Andrew with a $1 million investment.
Groupon was embedded into the ThePoint.com website. In October 2008, an email was sent to a list of 400 people offering two pizzas for the price of one at a Chicago restaurant located in the same building as the ThePoint/Groupon office. Twenty people bought the deal. New York City’s Groupon deal of the day: “Be a stock car driver”. For $169, ride shotgun with a professional driver and take home a custom race suit. | More deals were hatched and in March 2009, Groupon launched in Boston. In May 2009, Groupon launched in New York. The growth goal was to add one city per week with a total of 30 cities by the end of 2009. By late |
2009, subscribers were tallied at 1.5 million, 800,000Groupons had been sold, and customers had racked up $35 million in savings on the Groupon deals.
The momentum hasn’t stopped. As reported in the Wall Street Journal, Groupon is “projecting that the Company is on pace to make $1 billion in sales faster than any other business, ever”. Here are some impressive facts and figures: * To date, Groupon is in 565 cities around the world. * Total savings to consumers amounts to more than $300 million. * In April 2010, the company was valued at $1.35 billion. * In December 2010, the company was valued at $6.4 billion. * Jan. 2010 to Jan. 2011, revenues increased from $11 million to $89 million. * 4 million+ visitors to the Groupon website during April 2011 (see Figure 2). * U.S. 2011 total revenues estimated at $460 million. * Total 2011 revenue estimates $3 - $4 billion range. * The company is preparing for a $25 billion initial public offering (IPO) in 2011.

Figure 2. Number of people visiting the Groupon website for the 6-month period from Nov. 2010 through April 2011.

How does Groupon work?
Groupon.com posts a daily deal featuring “the best stuff to do, see, eat, and buy”. Globally, 50 million+ current subscribers receive a daily email promoting a deal unique to their city. These deals are exclusive, which means they have never been offered before and they are the best deal the merchant has ever run. If you like what you see, you buy with a click. Payment is easy with a credit card. Use it once, and the card number is kept on file for future purchases. The daily offer ends at midnight. If the minimum number of buyers is not met by the deadline, the deal is off. When the minimum is met, the deal is on. When the deal is on, each buyer receives a confirmation of their purchase and is directed to download the coupon the day following their purchase. The buyer then prints the Groupon, redeems at the place of business, and talks up the awesome experience they had and the money they saved while having it.

|

What’s in it for the Merchants?
Groupon has a staff of editors and writers to help the merchant design the deal. The merchant does not have to open their wallet. There is no cash outlay. Exposure is free. Customers are guaranteed. The daily deal is emailed to customers, and if the deal is on, the next day the merchant gets a check for 50% of the sales. Groupon receives the remaining 50%.

Are daily deals good for business?
Arguments can be made that daily deals do not serve the best interest of the merchant or the consumer. For instance, customers can abuse the system by printing out multiple Groupons and attempting to use them more than once. Customers push the limits of the deal by asking to split the value of the deal among multiple visits. Purchases are put on hold while customers wait to buy expecting a deal. The revenue generated is often not enough to cover costs and businesses end up financing the deal over a 6-month period or longer. The quantity of deals sold can swamp the merchant. The business isn’t able to accommodate the volume resulting in unsatisfied customers and/or not enough product to satisfy demand.
In spite of these setbacks, over 97% of Groupon merchants run repeat offers. Some have done away with traditional advertising modes, such as newspaper and radio, to focus their promotional efforts on daily deals. Merchants bank on Groupon to reach new customers. Once in the door, it’s up to the merchant to sell the benefit of their service, enticing each customer to buy and come back for more. According to Jim Moran of Yipit, a company that tracks daily deals, "These offers are becoming a real channel through which consumers can regularly participate in activities they couldn't otherwise afford. From spas to golf to skydiving, consumers are using these offers to plan their weekends and vacations, and ultimately living better lives."

What does the future hold? Many competitors have entered the arena with similar daily offers. LivingSocial is Groupon’s most serious competitor. Demographically, LivingSocial skews a bit older and attracts customers in the 25-55 age range which can be to its advantage. AOL Inc. and American Express teamed up pairing online news with American Express’ mobile-commerce platform called Serve to offer daily deals. Google and Citigroup’s Mastercard are using Portland, Oregon as a test market of their partnership to offer deals over mobile phones. AT&T plans to enter with a mobile phone application. Worldwide there are 500 similar daily deal sites. As the competition reaches mind-boggling levels and consumers begin to feel overwhelmed by the deals that are served up daily, one can only imagine the next | | opportunity that will present itself. MobShop and ThePoint paved the way for Groupon and the collective buying model. Surely, there will be another Andrew Mason to invent a future buying model. Let’s hope it saves us more money!

Citations:
Agrawal, Rocky. (2011, June).Why I Want Google Offers and the Entire Daily Deals Business to Die. Retrieved June 13, 2011 from http://techcrunch.com/2011/06/11/google-offers-daily-deals-business-die/

CrunchBase. Groupon.Retrieved June 13, 2011 from http://www.crunchbase.com/company/groupon

Fast Company. Groupon: For reinvigorating retail—and turning down $6 billion. Retrieved from http://www.fastcompany.com/most-innovative-companies/2011/profile/groupon.php

Flynn, L.J. (2001, January). The New York Times.MobShop, a Group-Buying Site, Drops its Consumer Business. Retrieved June 13, 2011 from http://www.nytimes.com/2001/01/15/business/mobshop-a-group-buying-site-drops-its-consumer-business.html

Marshall, J. (2011, June). U.S. Groupon Users Skew Younger than LivingSocial’s. Retrieved June 13, 2011 from www.clickz.com/clickz/news/2078607/groupon-users-skew-livingsocials

Salmon, F. Reuters.The big Groupon question. Retrieved June 12, 2011 from http://blogs.reuters.com/felix-salmon/2011/06/11/the-big-groupon-question

ThePoint. Making Peace with the World. Retrieved June 19,2011 from http://www.thepoint.com/campaigns/making-peace-with-the-world

Woo, S. & Fowler, G.A. (2011, June). The Wall Street Journal. With Daily Deals, Digital-Ad Firms Break Into Local Market. Retrieved June 13, 2011 from http://techcrunch.com/2011/06/11/google-offers-daily-deals-business-die/

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[ 2 ]. CrunchBase. Groupon. Retrieved June 13, 2011 from http://www.crunchbase.com/company/groupon
[ 3 ]. Groupon Milwaukee featured deal. Retrieved June 13, 2011 from http://www.groupon.com/milwaukee/deals/larsen-bakery-inc-2?date=20110614&p=@counter&s=body&utm_campaign=larsen-bakery-inc-2&utm_medium=email&utm_source=newsletter&c=button&utm_content=all-deals_milwaukee&user=66aa7eef51735d02a0fbcc98955eb78c25056a666d5cc99545b4bc2e52114c14
[ 4 ]. Sitler. R. ThePoint. Making Peace with the World. Retrieved June 19,2011 from http://www.thepoint.com/campaigns/making-peace-with-the-world
[ 5 ]. Adam Stachowiak Interview with Andrew Mason. Episode 59. Web 2.0 (December 2009). Retrieved June 13, 2011 from http://92.s3.buzzsprout.com/1811.mp3
[ 6 ]. Groupon New York City. “Be a Stock Car Driver.” Retrieved June 19, 2011 from http://www.groupon.com/new-york/?post_subscribe=true
[ 7 ]. Bari Weiss (December 18, 2010). "Groupon's $6 Billion Gambler". Wall Street Journal. Retrieved June 13, 2011 from http://online.wsj.com/article/SB10001424052748704828104576021481410635432.html
[ 8 ]. QuantCast.com. Groupon traffic figures. Retrieved June 19, 2011 from http://www.quantcast.com/groupon.com#demo
[ 9 ]. CrunchBase. Groupon. Retrieved June 13, 2011 from http://www.crunchbase.com/company/groupon
[ 10 ]. Lisa Greim (May 12, 2011). “Will ‘Groupon Fatigue’ Doom the Daily-Deals Business? PCWorld. Retrieved June 19, 2011 from http://www.pcworld.com/printable/article/id,227792/printable.html

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