3.2 Case 2: Groupon

Another type of business that has appeared online and accelerated with the wide distribution of personal computers and smart phones is e-coupons, sometimes known as daily deal coupons. This section profiles the market leader, Groupon, which has a company history that is not dissimilar from that of Web Van (described in Chap. 2) in experiencing the rewards and risks associated with a get-big-fast philosophy. Groupon has the 85th most web traffic in the United States, making it the second most trafficked food website in America (Alexa.com, as of May 2013).

Coupons are an old business practice, but they have received a new life in the age of the Internet and smart phones. Apparently, Coca-Cola offered the first business coupon in America, in 1888. By 1913, more than eight million consumers had tried a free glass of the "real thing," and the coupon industry was born with newspaper and magazine coupons, coupon books, and the like (Bowman 1985).

People sign up, at no cost, with one of the e-coupon companies such as Groupon, Living Social, or Google Offers. Each day, the Groupon member is given the oppor tunity to purchase at a reduced price from a small collection of products or services being offered in her local area. The consumer pays Groupon and then receives a coupon to use, for example at a local restaurant or a local spa. Groupon typically retains about half the revenue from the coupon purchase and pays the remaining funds to the restaurant. To make the couponing effort a worthwhile advertising ven ture for the restaurant, the deal does not consummate until a pre-determined number of customers have agreed to buy coupons. Once this tipping point is reached, the customers have their credit cards charged and they receive their coupons online (Cohen 2009: Restaurant Hospitality 2011b; Sennett 2012).

The company primarily responsible for building this model is Groupon, although today it has hundreds of competitors. Groupon's only real predecessor was Mercata, a start-up business founded by Microsoft co-founder Paul Allen in 1999 and closed in 2010, which allowed people to get discounts on items by banding together and buying them in bulk (Burkeman 2011). The founder and CEO through early 2013) of Groupon was Andrew Mason (Coburn 2010: Williams 2010). Both of Mason's

parents ran their own small businesses, and as a teenager he resold candy bought from Costco in the school cafeteria to generate spending money. His main interest was in music. After graduating with a music degree from Northwestern University in 2003, he went to work designing web pages for companies in the Chicago area. In Fall 2006 he quit his job to enter a master's degree in political science at the University of Chicago.

According to the creation myth, in 2006 Mason had difficulty resolving a contractual problem with his cell phone provider, and he began to think about how he could leverage more power in this kind of bargaining situation by uniting with other consumers. This led him to consider how to use social networking technology to organize people for collective actions that were too large for individuals to solve on their own not only in this kind of business transaction but also, for example, in taking political action.

Mason worked as a tech employee for two companies, Echo Global and Inner Workings, founded by Chicago venture capitalist Eric Lefkosky. One day in 2007 Lefkosky surprised Mason by offering him 1 million dollars to build the social networking platform Mason had been talking about. Mason dropped out of graduate school and developed ThePoint, which was a web-based technology that enabled people to sign up for a political or social cause but would not engage them until a pre-determined tipping point had been reached - a tipping point high enough that a collective action would have a reasonable chance to achieve the goals of the cause. Some of the uses of ThePoint in its first year were fanciful, such as an effort to sign people up to pay for a dome to be built over Chicago to keep out the harsh winter weather (This particular action never came close to reaching its tipping point, although it did attract some people who pledged $10,000!). About a year into the project, Lefkosky became uneasy about his investment and pushed Mason to move quickly to find an application of ThePoint that would yield a profitable return. Mason and Lefkosky agreed on collective buying, which quickly turned into Groupon, launched in November 2008

The company initially set up business operations in Chicago and maintained its headquarters there. It grew at a breakneck pace, opening in a new city every few weeks (Steiner 2010). By 2010 it had enrolled over 70 million members, received more than $700 million in revenue, operated in almost 100 US cities and 25 other countries, and employed almost 10,000 workers (O'Dell 2010). It expanded into Europe by acquiring CityDeal, a German knock-off of Groupon that had unusually effective operations. When one thinks of an Internet company, one thinks of hordes of programmers. The technology at Groupon is simple, and the company employs mostly writers and sales people, not programmers. Many of the copywriters hired have experience as journalists. Employees hone their ability to write the witty, sometimes biting copy that Groupon has come to be known for in training sessions at what is known as the Groupon Academy (Weingarten 2010). An example of this style: 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" (Groupon ad as quoted in Weiss 2010). A number of the early customer-service employees were actors or stand-up comics from Chicago's improv

comedy scene. Most of the employees are young and the majority are women, perhaps because it is believed they will respond better to the large number of coupon offers directed primarily at women, e.g. for manicures or spa treatments. Mason attributes the success of Groupon to its ability to serve as a "discovery engine" by which people can learn more about the complex metropolitan area in which they live-e.g., try a new restaurant or do something such as rock wall climbing that they would not otherwise try. It is common for people to use Groupons to create social events with family or friends, e.g. go to a new restaurant together.

What Groupon is really offering to the restaurants is a marketing service. For small businesses, it can be a good alternative to traditional marketing. The small business receives exposure through the Groupon offer to every individual signed up with Groupon in that geographic region, whether or not the member elects to pur chase the coupon to eat at the restaurant. The small business does not have to pay any money up front to Groupon as it would to a traditional marketing company Instead, it pays for its marketing by receiving lower than normal revenue on the featured product it provides to customers. If the Groupon purchases $40 worth of meals at the restaurant for a price of $20, and the restaurant receives from Groupon half of the cost of the coupon, the restaurant receives only $10 in revenue to provide $40 worth of meals. (The restaurant often also receives additional revenue from the Groupon customer, at regular prices, for items purchased in addition to those cov ered by the coupon.) Using Groupon, the restaurant only needs to provide discounts to customers if it is assured of receiving enough new traffic (by having enough people purchase this coupon so that the tipping point is achieved).

According to a study by Rice University professor Utpal Dholakia (2011), cover ing the period August 2009 through March 2011, restaurants do worse econom cally than other types of companies that sign up for daily deal promotions with Groupon: 43.6 % of the restaurants earn a profit from their e-coupon deal, and only 35.9 % are willing to run another e-coupon promotion. Thus in the majority of cases, the restaurant loses money on each customer. A serious problem can arise when a large number of subscribers sign up for the coupon, since the per-coupon loss is multiplied many times over. From its earliest days, Groupon established a minimum number (the tipping point) at which the coupon went into effect. Not long into its history, however, Groupon decided to allow restaurants and other busi nesses) to also set a maximum number of coupons that could be sold as a means to limit the loss through these loss-leader promotions. Unfortunately, restaurants and other businesses that sign up with Groupon do not always understand the risk fully and might not be able to predict accurately the interest the coupon will attract to their product, so sometimes they do not set maximum coupon sales or set them too high (Streitfeld 2011b).

Two well-circulated examples show how damaging an overly successful Groupon subscription can be for a small business (Mui 2010). In one case, a British woman who had been making and decorating cupcakes for 25 years ran a Groupon promo tion without setting a cap. She received Groupon orders from 8,500 customers, who ordered more than 100,000 cupcakes, and the losses on this promotion wiped out her entire year's profits (Wilkes 2011). In another case, the Groupon promotion for

Posie's Caf in Portland, Oregon, which sold almost a thousand coupons, swamped the caf with customers for 3 months - driving away some regular customers and the owner had to take $8,000 out of his personal savings to pay for the extra labor needed to serve these new customers (BBC 2012: Carrera 2011).

Groupon attracts restaurants and other businesses to sign up for coupon deals through paid advertisements on Google and Facebook, and by intensive sales calls in locations where the company operates or wants to operate. The response has been strong; in fact, in its early history Groupon turned down seven out of eight compa nies that wanted to offer coupons so as to keep its product offerings of high quality. The biggest response to date to a Groupon offer is a $25 coupon for S50 worth of merchandise at The Gap clothing store; more than 400,000 coupons were sold. Groupon works at providing strong customer service, operating an around-the-clock

di following a no-questions-asked return of coupons policy. As of late 2010, 95 % of Groupon offerings were reaching their tipping point. Groupon improved its coupon marketing by personalizing the offers it sends to members, based on gender, location, and buying history. Groupon also made changes so that individual users can set personal preferences to only receive information about spe cific types of deals. The company has recently expanded its offerings with a location based service oriented toward mobile phones called Groupon Now, which involves making offers in a small geographic area available only for a short duration (typi cally a few hours). It has also started several other businesses: Groupon Live, a partnership with Live Nation Entertainment to sell discounted tickets to live con certs; Groupon Getaways, to sell discounted travel and hotel deals in collaboration with Expedia; Groupon Goods, a direct seller of discounted goods; and Groupon Reserve, a premium service with exclusive offers for an elite audience.

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Growing as rapidly as the company has, and offering service in so many loca tions, has required substantial capital. In addition to the initial funding received from Lefkosky, Groupon received $135 million from Battery Ventures in Silicon Valley, Digital Sky Technologies in Russia, and several other venture capital firms. Groupon turned down an offer in 2010 from Yahoo to purchase the company for an estimated $23 billion (Arrington 2010). Groupon surprised the investor community later that same year when it declined a takeover offer of $6 billion from Google - what would have been the largest acquisition ever made by Google (MacMillan and Galante 2010; Weiss 2010). Mason claimed the reason for this decision was his concern that the acquisition would lead to lower employee morale and worsened relations with business clients. Some analysts argue that it was instead because several Groupon board members believed that the Google offer undervalued the company, while other board members were concerned about attracting antitrust scrutiny. In 2011, Groupon had an initial public offering, which raised an additional $700 million.

Question: Does the company have first movers advantage or disadvantage? Explain.