Groupon gets personal

Filed under Special Reports

Groupon founder Andrew Mason; Forbes cover photo by Rudy Archuleta

To hear founder and CEO Andrew Mason tell it, Groupon is not all about saving money.

It’s about encouraging people to  try new experiences by reducing the financial risk, also known as the price.

That mission promises to mold the Chicago-based company’s new targeted marketing strategy, where customized Groupons are offered to subsegments of its 13-million-name e-mail list. Instead of one mass deal of the day, Groupon will offer more “personalized deals,” doled out according to user data, such as purchase history, geography, gender and age.

The strategy is similar to old-school direct marketing, where catalog merchants produced niche books and sent them to select groups of customers on their lists.

“The move makes a ton of sense,” said Tim Calkins, clinical professor of marketing at Northwestern’s Kellogg School of Management.  “The more targeted you can become, the better the offers will resonate.”

Avoiding the spam factor

The bigger Groupon’s e-mail list, the less likely a one-size-fits-all approach will resonate with prospective customers. The danger of a mass approach, Calkins said, is that Groupon’s e-mails become spam to consumers. “You want to give people offers they’re likely to take advantage of,” he said. “The more targeted you can become, the better the offers will resonate.”

Targeting is a more strategic approach than a mass e-mail. “They need to take advantage of being the early player,” Calkins said. “It makes sense to grow quickly. It’s an idea that’s easy to copy.”

Despite the company’s meteoric success, Mason knows better than to become overconfident. When the company’s fast growth comes up at a company meeting, he reminds staffers that the tide can change quickly, as it has for many one-time Internet darlings. “There’s a lot more to do before we’ve achieved our vision,” he says. “We continue to focus on that with the same urgency and paranoia as when we started the business.”

Commercializing the tipping point

It’s that focus that impressed Brad Keywell and Eric Lefkofsky, the serial entrepreneurs who saw promise in Mason’s original idea, ThePoint.com, which was based on the concept of the tipping point, where individual action meets collective action to make something happen.

Mason had worked for Lefkofsky at InnerWorkings before going to graduate school at the University of Chicago, where he studied public policy, not business, when Lefkofsky called him between classes to hear more about his idea.

“I gave him a profoundly inarticulate pitch, but he had heard enough and he was excited about it,” Mason recalled. Two weeks later, Mason dropped out of graduate school to launch the business.

“Very few people would have jumped in the way we did,” said Keywell, Lefkofsky’s business partner and a co-founder of Groupon. “He was a specially brilliant kid who combined a great idea with a resourceful approach,” Keywell said.

Mason wanted to bring people together for social change, and he conceived ThePoint.com as a platform for organizing social action to “a tipping point” that would make an impact. He envisioned people starting a campaign to affect political or social change and using ThePoint.com to raise interest and funds for action.

A new purpose

But when ThePoint.com launched in late 2007, some people started using it for group purchases to save money. “I thought, ‘How can we take the collective buying aspect and make it interesting?'” Mason said.

ThePoint limped along, not quite reaching its full potential. “We struggled through several strikes, then got to the hit,” Keywell said. “It was the struggle with ThePoint that got us to Groupon.”

Mason launched Groupon in December 2008, nabbing the first 400 users by passing around postcards announcing the new business. Eight months later, it had 100,000 subscribers in Chicago, making Groupon the largest daily e-mail newsletter.

Count on Groupon to continue to evolve. “We still consider ourselves extremely immature, both emotionally but (also) in terms of product development,” Mason told a standing-room only crowd at SocialDevCamp Chicago in August. “There’s a lot more to do before we’ve achieved our vision.”

Adding mobile apps

Besides personalization, Groupon is building Android and iPhone apps, plus a mobile Web version, recognizing that more users are viewing Groupon on mobile devices.

While some entrepreneurs talk about innovation leading the way, Mason prefers to call it creativity. “By continuing to be creative, we’ll continue to improve the product for our customers and our merchants,” he says. That creativity includes using an informal, light-hearted copywriting style that isn‘t overly promotional, or as Mason said, “that doesn’t make us want to throw up.”

Groupon’s creativity ultimately might be the biggest difference between it and copycat competitors, which are multiplying rapidly. Some are narrowly defined by geography, while others compete with vertical offerings, such as OpenTable.com’s  Spotlight feature, which is a Groupon for restaurants, said entrepreneur Howard Tullman during a presentation on social media at a recent TechExpo.

Others try to undercut Groupon by taking less of a cut from merchants. But that’s not the best long-term strategy. “If you’re racing to the bottom, worried about price, you’re in the wrong game,” Tullman said. “If Groupon is really smart, what they will really do is morph.”

First-mover advantage

Groupon has acquired a few promising competitors, but staying abreast of new copycats is a never-ending task.  “There are 750 copies of us,” Keywell said. “Everyone’s copying us and we’re trying to figure out what’s next.” Still, Groupon owns most of the market with a sizeable lead, Keywell said.

Groupon has made the most of its first-mover advantage, scaling quickly. It moved into its second market just five months after its Chicago launch, but also was deliberate about validating its model. “It’s about being slow and meticulous and measuring carefully,” Mason said.  He took the advice of a venture capitalist who told him to “model out your organization,” and then start adding new cities.

Groupon currently adds about 12 cities a month and 120 employees. It’s been adding workers so fast in its Chicago headquarters that by the time it builds out a new work area to accommodate the latest throng of hires, it has already outgrown the space.

Testing the limits

Groupon’s swift growth is also pushing the limits of its original marketing approach, where only worthy promotions reached the tipping point to turn from concept to a real offer. Now, rather than failing to garner the necessary support, a bigger concern is overwhelming the merchant or the computer network.

Those limits were tested in August when 441,000 Groupon subscribers bought a $25 Groupon for a $50 Gap gift card, ringing up  about $11 million in revenue. But shopping at Gap was hardly the type of new experience that Mason had in mind when he launched Groupon.

Groupon’s personalization strategy makes offers more relevant to users, but it also will prevent the system from being overwhelmed by demand. As the fastest growing company ever, according to Forbes magazine, Groupon’s biggest risk could be expanding too quickly. The personalization tack is one way to manage that growth.

Staffing up and out

Making it work, however, will take more software development engineers than Groupon currently can find in the Chicago area, leading the company to open a technology office in Silicon Valley earlier this year.

In a matter of months, Groupon had a technology staff of 30 in Silicon Valley; it took the company 18 months to find as many qualified workers in Chicago, Mason said.  Still, the company would like to hire more local engineers, and Mason encourages smart, passionate Web developers to apply.

Some have speculated that Groupon might feel pressure to re-locate the company to Silicon Valley, Mason said he has no plans to do that. Aside from software engineers, Mason said Groupon has found plenty of qualified workers in Chicago.

An overwhelming response

In the beginning, many offers flopped. Some were so obscure that not enough people clicked on them to convert them to reality. But as Groupon gained traction and credibility for delivering what it promises, the real hurdle for merchants promoting their services or products wasn’t with consumers but with Groupon itself, because the company rejects more than six out of seven interested merchants, Mason said.

For those merchants chosen, about 98 percent of the offers reach the required tipping point for actualization. Increasingly, however, participating merchants must impose a limit on the number of Groupons they commit to, because some risk being overwhelmed by demand.

Groupon tries to prepare  participating businesses for a possible onslaught by distributing a packet of information on how to gear up for a Groupon promotion. But not all companies pass the information on to their front-line staff, Mason said. What’s more, some merchants are discovering the more people buy Groupons, the less likely they are to end the promotion in the black, because they generally split the revenue they receive with Groupon.

But Groupon’s personalization strategy should provide another solution. By offering certain deals to some people and not others, based on user data it has collected, Mason said its offers will be not only more relevant, but also targeted at a smaller group.

Mission comes first

Mason hopes the strategy will allow the company to maintain its original goal of encouraging users to try something new by reducing the price.  Mason is quick to point out, “We didn’t start Groupon by trying to turn it into a billion-dollar company.” The cash is a byproduct of Groupon’s success.

“If I had any idea at the time I would have ended up running a deal-of-the-day website, there’s no way I would have done it,” Mason told a reporter last year. “But I couldn’t be more content. We’re doing more good for people with Groupon that we would have done with the point.”

In its own way, Groupon is making an impact. “We’re helping business owners at a time they’re hurting and really need help,” Mason said. “And customers love it.”

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