Thursday, March 25, 2010
Have you heard of Groupon? Dan O'Connor, the head of the retail research and advisory firm RetailNet Group, informed me about this innovative new company a few months ago. Last week, Fortune's Jessi Hempel wrote about Groupon. As Hempel puts it, the company "marries coupons with the wisdom of crowds." Here's the way Groupon works: 2 million people have become subscribers to the firm's emails. Each day, Groupon offers one deep discount coupon in each of forty cities across the United States. One deal, for instance, might be for a spa in New York City. Subscribers receive an email about the offer. If enough subscribers express interest in the deal, then each respondent receives the coupon. For example, Groupon might offer a 50% discount to a particular spa, provided that 100 subscribers respond to the offer. If the offer does not attract enough subscribers, then the coupon is not given to anyone. How does Groupon generate revenue? They receive a fee from the businesses offering these deals, provided of course that they can get enough subscribers to meet the quota on a particular offer. Why do firms offer such steep discounts via Groupon? First, it provides a way to drive volume at times when they might have excess capacity? Second, it offers an opportunity to create some buzz among social groups within an urban area. Finally, many companies find that such deep discounts lead to follow-on visits from customers who are pleased with their first encounter with the particular company. Is Groupon successful, or are they just another start-up with lots of buzz and little profit? According to founder Andrew Mason, they've been profitable since June 2009, and they aim to achieve $100 million in revenue this year. That's pretty remarkable stuff, and it is transforming the way that many people purchase certain products and services.