Groupon and the Future of Web Business Models
This week in the Mercury News, I wrote about three promising business models emerging on the Web: Apps, virtual goods, and daily deals. The column was timed to the big DEMO conference this week in Silicon Valley, where I got a chance to meet Andrew Mason, CEO and co-founder of Groupon.
Groupon has become one of the Web’s most important start-ups. The company has had astonishing success by offering a single deal each day via email to people who sign up. Personally, I’ve become obsessed with my daily Groupon. But Mason’s appearance this week offered several lessons, I think, for people who are building start-ups with a news and media focus.
Based in Chicago, Groupon took a very un-Silicon Valley like approach to creating its business. The company was originally called Thepoint.com, a platform to allow people to organize actions or boycotts of some kind. The action would only occur if enough people signed up. But it was abstract, and not getting much use. And when the financial crisis hit, Mason said the company decided it needed to focus on making money. Fast.
Here’s a good first lesson: Be adaptable. We see this often in Silicon Valley, that the first business plan of a company isn’t necessarily the one that succeeds. Don’t be too attached to your original concept.
So they focused on a slice of the service that offered daily deals. There had been a previous generation of group buying sites, such as Mercado and Mobshop. The problem was that these were storefronts that depended on people coming to their sites. It was hard to build the crowd.
“If we would have tried to do that, we would have failed,” Mason said. “The problem was that they weren’t able to assemble the collective buying power they needed to be competitive and drive the costs lower.”
So instead, Groupon decided to build a business around email lists. Email sounds so Web 1.0. But in retrospect, it’s genius.
Here’s lesson two: Design the business with customers in mind. Too many entrepreneurs can get caught up in the latest, greatest technology. But Groupon sidestepped that and has gone where their users are: the inbox. And as a result, they’ve built a remarkably simple business that’s easy to use and easy to understand. And it’s placed them right in the mainstream.
Groupon is, in a way, the anti-technology start-up. For instance, the text on the email pitches is written by a staff of 70 writers at Groupon. Mason said he didn’t know enough to think about trying user-generated content or any other crowd-sourced strategy. He just figured that if he was going to send an email to someone every day, it needed to be entertaining and informative to ideally entice you to read it and hopefully take the deal. At the very least, it lowers the annoyance factor and makes it less likely you’ll unsubscribe.
“As consumers, we’re trying to build a product we really like,” Mason said.
Here’s lesson three: Constraints can be an advantage.
Mason said Groupon decided to send out one deal each day because its audience was so small. They adapted to the limitations they were stuck with. For any deal to have an impact for a merchant, Groupon needed to be able to deliver a large number of users.
“Our audience was so small, we had to channel it to one product to get enough audience to be of interest to the merchant,” Mason said.
That decision to create what Mason called “artificial scarcity” remains a virtue, but also a challenge. Groupon has a backlog of 35,000 merchants who want to do a daily deal. Groupon is trying to become more personalized as its audience grows, both by interest and location, so it can workth with more merchants. But in the meantime, there is so much demand that there are now hundreds of Groupon knockoffs that have been launched. Daily deal start-ups have become a mega category. Groupon is using a lot of the venture capital it’s raised to acquire some of those knockoffs in other regions around the world.
Groupon has been profitable almost from the start. The company has grown from 7 employees two years ago, to 2,300. They’ve raised more than $150 million in venture capital over the past year. And now Groupon has expanded to start doing partnerships with other publishers, such as McClatchy. Mason said the jury is still out as to how well those partnerships will work. But overall, the company is still in the mode of trying new things and iterating quickly based on the results.
For instance, there were complaints from some merchants early on that they were overwhelmed by foot traffic when they offered a Groupon deal. Just read this tale from Posie’s Cafe in Portland on how they lost $8,000 on their Groupon deal. Mason said the company has responded by allowing small business owners to put caps on the number of people who can take advantage of a deal.
“Sometimes businesses have eyes bigger than their stomachs,” Mason said. “People haven’t had the problem before where they have to say, ‘I don’t want too much advertising.’ “
One final thought: Groupon seems to finally be making inroads into drawing local merchants onto the Web. Many have tried and failed, both big companies and small. If they really have cracked the code, then Groupon is going to be huge. At the same time, news organizations should not sit on the sidelines. Given all the extra demand, there is plenty of opportunity for new newsrooms of all shapes and sizes.
For more thoughts on how local news organizations can enter the daily deal space, check out these two blog posts from Yipit, a deal aggregation service:
