Thursday, January 6, 2011

What is Groupon? - The next web phenomena

We know about the Self Help Groups and Micro-finance institutions that take advantage of collective buying power. Groupon (groupon.com) brings the same concept to web by offering a sales promotion offer (Coupon) everyday in every city it operates. Before I talk more about groupon.com here are some facts.
  1. Its founder Andrew Mason turned down a $6 billion offer by Google (Google's highest offer, almost double of its highest acquisition in history) - Dec'10
  2. It took two years to reach this status and Groupon had net revenues of around $350 million in 2010 (Founded in Nov'2008)
  3. Andrew Mason (Founder of Groupon) used to work in web design with another serial chicago entrepreneur (Eric Lefkosky)
  4. When Andrew Mason Left Lefkosky to go to high school and started working on a project "The Point", Lefkosky got the word.
  5. He went to Mason and told him to draw the outline for "The Point". Lefkosky instantly gave Mason $1 million in seed money and Mason later dropped out of school to work full time for the project.
  6. The point is a site that allows people to make contributions, do stage plays or perform for a cause.
  7. As The point became popular, Lefkosky asked Mason to figure out a way of making money and they had three options. The first was to go for ads (Like Google, Facebook and most other sites), the second was to take a share out of fund raising (Similar to Wikipedia) and third was collective buying (And there came the concept of Groupon).
The Business Model
The business model of Groupon is quite simple. They tie-up with a local business that comes out with an offer (a coupon or sales promotion offer). Every day atleast one such offer is put on their website. If a minimum number of people signup for the offer, the deal is available for everyone or if the minimum number is not met, no one gets the offer. So if you buy a $40 coupon for an $80 service, the local business gets customers and Groupon has a 50% share of the revenue. It guarantees the local business minimum number of customers needed to make the sales promotional offer profitable and it gives customers a good deal. Groupon promotes these offers to its users using social media.
Quite like the Self Help Group (SHG) concept a deal is only available if the minimum number of signups required to keep the deal profitable are met. 
With a $3 Billion offer from Yahoo! in Oct'10 and $5.3 Billion offer from Google, both turned down by Groupon, it is being speculated that Groupon will come out with its IPO by 2013.
I'd say they have taken a very bold step to come out on their own with a tough competitor in the form of Living Social, which recently received a funding of $175 million from Amazon (Dec'2010).
Collective buying gives both businesses and customers a good deal. This is facilitated by Groupon and yes, you've got it, "The Social Network".
Another thing that wonders me is that why don't the big companies get such ideas? The answer is fairly simple. They do conventional market research.
Market Research, Big 3 and New Product Development
Marketing is also about getting the right product. There are latent needs that Conventional Market Research fails to identify. To get new ideas, the Big 3 auto giants of US resorted to continuous market research whereas the eastern auto companies sent their scientists on a sponsored vacation. The Big 3 came out with minor changes in their gas guzzlers, whereas the eastern companies came out with more efficient cars. The reason for such a difference is that Market research results in what is known as "Product Tinkering". Radical innovations or path breaking concepts are not a result of such minor changes. Market research addresses what a customer says, where as latent needs aren't known to the customer himself. The most successful products come out of meeting those latent needs, like collective buying in the case of Groupon. Paying special attention to what a customer does and not what he/she says, is key to the successful development and marketing of a new product. If you carefully look at the history of Groupon, they coincidentally did that with "The Point" coming first and then coming out with Groupon.