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What's the Secret Success of Groupon?

by Vincent Chan on Apr 21, 2010

If you have never heard of Groupon recently, you probably are not working in the tech industry because it is all over the blogosphere. After all, growing from zero to US$1.35 billion valuation in 18 months is pretty AMAZING.

So what are their secret weapons? What are they doing right? How are they gaining customers at such a rate? Let’s take a look.

Crystal Clear Value Proposition

Groupon’s goal is clear: help introduce people to your business. Each coupon on the site has a predetermined minimum. If not enough people sign up for the deal to take effect, neither Groupon nor the business makes any money. Groupon makes money by getting a cut of these promotions from the retailers.

According to Jeremy Liew from Lightspeed Venture Partners, Groupon went from around US$100,000 in revenue in Jan 2009 to around US$10 million in revenue in Jan 2010 – a 100X increase in just twelve months.

When many retailers are struggling to survive in this economy, Groupon has become their savior. According to Andrew Mason, Groupon’s founder and CEO, nearly all of their deals have succeeded so far. And there is currently a 120 deals waiting list in Chicago alone. As you can tell, Groupon uses collective buying to create a win-win for local businesses and their customers. No wonder so many merchants are eager to participate.

Built Virality inside the Product

Since each deal is only good for one day, it creates a sense of urgency for the users and make them feel excited.

Obviously, users want to make sure the minimum is hit. What can they do? Tell their friends. Groupon takes that social component to the next level through Facebook Connect and Twitter, inviting a user’s entire network to get in on the deal.

Their user acquisition costs? Zero.

Groupon also invested a lot resources on customer service, from our help line to quick online response to customer issues. So customers are happy and continue to help Groupon reach new heights.

Alternative to Traditional Advertising for Local Businesses

Andrew wants people to treat Groupon like “a city guide that offers promotions“. He wants to help people have fun in the city and save money using the tremendous power of group buying.

In order to do so, they have to work with retailers to create attractive deals. Like the founder said:

We help businesses navigate the new world of social media and Internet marketing in an approachable, creative way. An appearance on Groupon validates these businesses as a cool part of their community.

For local business owners, Groupon has become an alternative to traditional advertising, where they pay up front and hope for the best. In this new platform, these promotions are like a whole new form of local advertising, where merchants only have to pay for REAL result.

Moreover, because of those unbelievable prices, customers will purchase something they’ve always wanted to try but never had the chance, bringing a flood of new customers to local businesses, at least some of them will hopefully get hooked and become loyal clients eventually.

Negative Working Capital

In accounting:

Working Capital = Current Assets – Current Liabilities

It is the amount of money that a business needs to stay in business. According to Business Insider:

Some businesses have negative working capital: they get money from sales before they pay suppliers.

For companies like Walmart and Amazon, they actually need no working capital because they negotiate deals in such a way that they only pay for things after 1-3 months. Most of the time, the stuff they buy is long sold by then. And people who go to Walmart to buy stuff will pay immediately, which means that Walmart is actually sitting on a pile of cash that it really does not need. So they can pay their debt slowly or use the extra cash for investment.

These businesses basically are financed by their customers. Negative working capital is a tremendous thing to have in a business. Apparently, Groupon has a large negative working capital (4 million Groupons have now been sold already). They first charge users upfront, take a cut and pay merchants back later. This is one of the reasons why Groupon is such a great business.

What’s your opinion? What makes Groupon such an attractive investment to VC? Let us know in the comment area.

*UPDATE: One of our readers asked what caused the visit jump from a hundred thousand or so to 2 million in mid 2009.

*ANSWER: Good question! Groupon originally operated only in Chicago, New York City, Boston, Washington, D.C., Los Angeles, and San Francisco. They started to launch to other cities in mid 2009, like Atlanta, Denver, Dallas, San Diego, Phoenix and Seattle…etc, more than 20 cities by the end of 2009.

*CORRECTION: Oops! It seems my answer is not correct. Andrew, the founder of Groupon, just told us the real answer in the comment section. “mid-2009 traffic jump: we used to be groupon.thepoint.com; that’s when we changed to groupon.com”. Thanks a lot, Andrew!

**UPDATE 2: One of our readers asked how Groupon has managed to distance themselves from the pack.

**ANSWER: And he got the answer from Andrew directly on Twitter! His answer, “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck”.


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Category: Case Study, Strategy

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  • http://www.mynext.co.uk mynext

    Amazing visits jump and looks like a nice viral way to advertise.

    Would be interested to know what they did in july to jump from a hundred thousand or so to 2 million

  • http://kynamdoan.com KyNamDoan

    GroupOn was certainly not the first, I'm still at a loss for an explanation on how they've managed to distance themselves from the pack.

    They may have been the first to implement minimums, and do it well. Anyone know?

  • http://www.facebook.com/drzhang Dave Zhang

    Nice blog, Vincent! I especially enjoyed your rundown of Groupon's working capital – great insight.

    Groupon's a great business and great for many businesses. And of course, it's fantastic for consumers. I'm slightly concerned with how it's going to affect the pricing structure of certain industries though, and even wrote a blog post about it. I'd love to hear your thoughts: http://vaynermedia.com/2010/04/groupon-how-i-le

  • http://Scale.cc Vincent Chan

    Thanks for your great question.

    Groupon originally operated only in Chicago, New York City, Boston, Washington, D.C., Los Angeles, and San Francisco. They started to launch to other cities in mid 2009, like Atlanta, Denver, Dallas, San Diego, Phoenix and Seattle…etc, more than 20 cities by the end of 2009.

  • http://Scale.cc Vincent Chan

    Good question!

    I think one of the reasons is due to their roots – The Point, the startup using collective power to help people deal with local issues. Groupon's founder once said, “None of us would work here if it were only about selling stuff at a discount—ultimately, we're trying to give people an excuse to get out of the house and enjoy life.”

    I think a successful company needs to have a corporate mission that is bigger than making a profit. I believe their roots help them build a strong brand and user base.

  • niyogi

    user acquisition costs are clearly not zero as they plaster facebook, pandora and google search results with their ads. no doubt however that they expect that a “purchased” user would in some probability invite others to use their site as well.

  • http://Scale.cc Vincent Chan

    Thanks for your visit! Your post is great!

    However, if I was a small business owner, I will be optimistic about Groupon because it's a great way to pull in customers that I couldn't reach before. With those crazy discounts, I doubt any businesses are making profits from them. They are more like an advertising cost. I don't think Groupon will cause retailers to turn into crazy price competition 🙂 Just my opinion.

  • http://groupon.com Andrew Mason

    Thanks for the article!

    Re: mid-2009 traffic jump: we used to be groupon.thepoint.com; that's when we changed to groupon.com

    Andrew

  • http://www.mynext.co.uk mynext

    Amazing visits jump and looks like a nice viral way to advertise.

    Would be interested to know what they did in july to jump from a hundred thousand or so to 2 million

  • http://kynamdoan.com KyNamDoan

    Andrew responded to me on twitter: “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck”

    There you have it! 😛

  • http://kynamdoan.com KyNamDoan

    GroupOn was certainly not the first, I'm still at a loss for an explanation on how they've managed to distance themselves from the pack.

    They may have been the first to implement minimums, and do it well. Anyone know?

  • http://www.facebook.com/drzhang Dave Zhang

    Nice blog, Vincent! I especially enjoyed your rundown of Groupon's working capital – great insight.

    Groupon's a great business and great for many businesses. And of course, it's fantastic for consumers. I'm slightly concerned with how it's going to affect the pricing structure of certain industries though, and even wrote a blog post about it. I'd love to hear your thoughts: http://vaynermedia.com/2010/04/groupon-how-i-le

  • http://Scale.cc Vincent Chan

    Thanks for your great question.

    Groupon originally operated only in Chicago, New York City, Boston, Washington, D.C., Los Angeles, and San Francisco. They started to launch to other cities in mid 2009, like Atlanta, Denver, Dallas, San Diego, Phoenix and Seattle…etc, more than 20 cities by the end of 2009.

  • http://Scale.cc Vincent Chan

    Good question!

    I think one of the reasons is due to their roots – The Point, the startup using collective power to help people deal with local issues. Groupon's founder once said, “None of us would work here if it were only about selling stuff at a discount—ultimately, we're trying to give people an excuse to get out of the house and enjoy life.”

    I think a successful company needs to have a corporate mission that is bigger than making a profit. I believe their roots help them build a strong brand and user base.

  • niyogi

    user acquisition costs are clearly not zero as they plaster facebook, pandora and google search results with their ads. no doubt however that they expect that a “purchased” user would in some probability invite others to use their site as well.

  • http://Scale.cc Vincent Chan

    Thanks for your visit! Your post is great!

    However, if I was a small business owner, I will be optimistic about Groupon because it's a great way to pull in customers that I couldn't reach before. With those crazy discounts, I doubt any businesses are making profits from them. They are more like an advertising cost. I don't think Groupon will cause retailers to turn into crazy price competition 🙂 Just my opinion.

  • http://groupon.com Andrew Mason

    Thanks for the article!

    Re: mid-2009 traffic jump: we used to be groupon.thepoint.com; that's when we changed to groupon.com

    Andrew

  • http://Scale.cc Vincent Chan

    Thanks for your insight! Getting your comment is my honor.

    I should do a better research next time.

  • http://Scale.cc Vincent Chan

    Thanks for sharing this! It seems Andrew is really good at tracking this discussion about his company. He left a comment below too 🙂

  • http://Scale.cc Vincent Chan

    Thanks for your comment! You are right, their user acquisition cost probably is not zero but it should be really low. May be I have exaggerated a bit 🙂 According to Jeremy from Lightspeed Venture, “If you understand your customer lifetime value, and you can acquired customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample.”

  • http://kynamdoan.com KyNamDoan

    Andrew responded to me on twitter: “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck”

    There you have it! 😛

  • http://Scale.cc Vincent Chan

    Thanks for your insight! Getting your comment is my honor.

    I should do a better research next time.

  • http://Scale.cc Vincent Chan

    Thanks for sharing this! It seems Andrew is really good at tracking this discussion about his company. He left a comment below too 🙂

  • http://Scale.cc Vincent Chan

    Thanks for your comment! You are right, their user acquisition cost probably is not zero but it should be really low. May be I have exaggerated a bit 🙂 According to Jeremy from Lightspeed Venture, “If you understand your customer lifetime value, and you can acquired customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample.”

  • http://www.mynext.co.uk mynext

    Thank you very much

  • http://www.mynext.co.uk mynext

    Thank you very much

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  • skan

    what is Groupon's annual revenue and growth rate? how come i can't find an official number anywhere?!

  • http://Scale.cc Vincent Chan

    Groupon is not a public company yet so I don't think you can get 100% accurate financial data online. But you can get a reference from this blog post:

    http://www.businessinsider.com/what-are-groupon

  • Gmail

    This might sound sound elementary but if Groupon collects cash immediately and doesn't pay until later…Wouldn't that be an increase in current assets(cash)? Im not sure where the negative comes from.

  • http://Scale.cc Vincent Chan

    You will have a better idea after reading this post:

    http://beginnersinvest.about.com/od/analyzingab

    In short, as long as the transactions are timed right, they can pay each bill as it comes due. They won't hold the cash. They can spend it on other stuffs.

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  • Robert

    While Groupon and LightSpeed might understand LTV, they’re pretty much relying on their customers (small businesses) not understanding it.

    Training customers to jump from deal to deal is not a good thing for small businesses.

    Although there’s no upfront cost to the business, they need to be mindful of:
    – How much of the Groupon sales will be to existing customers (margin lost)?
    – Will they be able to service all the customers who buy? I’ve seen small salons and massage places that could easily fill 2-3 months of their appointment book with low value customers, possibly displacing customers paying full price.
    – Will Groupon customers return or are they drawing only price sensitive shoppers?

  • observer

    Sure, that gets the wave going, but to grow the business Groupon will have to reach the mass market which is less concerned about quirky editorial and more interested in a great deal. Groupon has to come up with a more competitive advantage than “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck” and I have no doubt they will.

  • observer

    actually, I know they are in the midst of spending >$25MM in advertising, so I'd call that no small sum for acquisitions.

  • http://grouponclone.contussupport.com/ Contus

    Thx so much for your article. Im waiting for your new ones like livingsocial…

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  • Emkwan

    Thanks for this information really very interesting. What I’m intrigued about is how groupon made its first 5 – 10 sales… How did they get customers on board they must have had email accounts of interested customers before approaching companies right? or did they do something else?

  • DenverJo

    I really liked your article, Vincent. I guess my question to you relates to marketing at a cultural level. How does Groupon make sure its localized messaging creates the same ‘tipping point’ effect in the culturally-diverse cities and countries where it now has a presence? I imagine what would make me be enticed by a wittily-worded coupon might not entice someone in Santiago, Chile or Warsaw w/similar wording (obviously translated).

  • Katy

    Hi! thanks for the post, really interesting. just one question, im currently thinking about my dissertation topic and thought that groupon case is a great area to look at. can you give me a clue what would you chose as a dissertation topic based on the groupon case?

  • http://twitter.com/awartany Bahaa’ Awartany
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  • Rozmel

    …but, is it sustainable or will there be GroupOn saturation? How about the conflict between teh GroupOn loyalist vs. mercant loyalist? Doesn’t GroupOn need to create GroupON loyalist for it to succeed?nhttp://smbizconsult.blogspot.com/2011/06/groupon-is-like-dating-in-nyctherefore.html?spref=fb

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