Groupon rides group-buying wave

Group buying has become a hot trend in the social media space, and Groupon, the market leader for group coupon sales, has grown at a remarkable rate. SNEWS takes a peek at what it could mean to the industry.
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On Nov. 9, Michigan-based retailer Moosejaw launched a promotion on the Groupon website, allowing consumers to purchase $50 worth of gear for just $25 -- if they used a coupon.

“Let’s see…it’s only 10:30 a.m. and almost 2,000 people have bought into it,” Sarah Rewold, Mooosejaw’s marketing coordinator, told SNEWS® the day of the promotion.

Groupon (www.groupon.com) is one of the growing numbers of coupon websites that has deals offered by companies that are activated only once a certain number of people agree to purchase that item or deal. The threshold for activation is set by the company where it believes it can break-even -- in money, exposure, new customers or whatever. In this case, once 200 people bought into Moosejaw’s latest deal, the coupon was set to become valid. That also creates a grassroots viral promotion with those who want the deal campaigning friends and colleagues to buy in too, thus creating additional company promotion.

The concept of group coupons emerged about two years ago, but the buzz has grown much louder in the last few months. This is not only because the Groupon company has grown at a remarkable rate, but also because group coupons have emerged as one of the hottest trends in social media, and small businesses see them as a tool to attract masses of new customers.

“We’ve been happy with the results in terms of exposure,” said Rewold, noting that Moosejaw also ran a promotion through Groupon in June and attracted 1,200 shoppers. “We exceeded our expectations, and about half of the people using the coupons are new customers.”

Groupon’s meteoric rise

There are now dozens and dozens of group coupon sites, such as LivingSocial (www.livingsocial.com) and 8coupons (www.8coupons.com), but Groupon is, undoubtedly, the category leader. Launched in November 2008, Groupon is on track to earn more than $500 million in revenue this year, according to an August report by Forbes.com. This spring, the company had a valuation on the stock market of $1.35 billion, and Forbes.com noted, “The only company to reach a $1 billion valuation faster was YouTube.”

Groupon is now seeking funding that could boost the company’s value to between $2 billion and $3 billion, according to a Nov. 8 report by Business Week.

“We saw exceptional growth in 2010,” Julie Mossler, spokesperson for Groupon, told SNEWS, noting that the company operates in 30 markets in North America, 31 countries around the world and has 25 million subscribers.

While Groupon’s growth is evidence that group coupons have great business potential, there are also many experts who say that group buying is the hottest thing in social media right now. During the Outdoor Industry Rendezvous, held in October in Asheville, N.C., Jim Tobin, president of Ignite Social Media (www.ignitesocialmedia.com), identified group buying as one of the biggest social media trends.

In August, the social media news website Mashable.com listed group buying in its post titled, “5 Huge Trends in Social Media Right Now.”

“All signs indicate that the group buying trend will only increase in popularity over time,” the site reported. “Local businesses are finding that they can successfully attract new and repeat business by introducing customers to their services with a deeply-discounted group coupon.”

Mashable noted that there are not only growing numbers of Groupon copycats, but also new technologies that enable businesses to implement their own group-coupon programs. “Wildfire has a Facebook-friendly, do-it-yourself Group Deals product, Megachip Technologies just launched their own daily-deal coupon software, and daily-deal site Adility launched a Groupon-like platform for small business earlier this summer,” Mashable reported.

Reasons for Groupon’s success

Groupon’s great success no doubt stems from the fact that the company was launched just as social media got hot, and Internet shoppers began to increasingly share buying decisions with others. Plus, Groupon has benefited as coupons have become more popular due to the recession.

But another important element of the Groupon business model is that it’s designed to help small businesses. Groupon has a large force of salespeople who target small businesses in many cities around the world, including 100 cities in North America. Once a Groupon salesperson finds a local merchant in need of some exposure, Groupon creates a custom coupon deal to suit the particular business.

Mossler said Groupon has risen above its competition because it has studied and, therefore, understands the types of coupon deals that work well for various sellers. “We have a really good idea of what works for a spa versus what works for a retail store or restaurant,” she said.

Most Groupon deals involve very deep discounts -- a spa, for example, might offer a coupon with a 90-percent discount for its services. While a merchant might not make great profits off initial sales generated by the Groupon deal, it can lure massive numbers of new customers.

“Our goal from these is not to make money off the Groupon deal, but to grow our customer base,” said Rewold of Moosejaw.

For a small business, Groupon can also serve as an effective alternative to traditional advertising. For one thing, a merchant does not pay Groupon to participate, so there is no up-front cost. “Traditionally, whether you’re a mom-and-pop store or The Gap, you’re cutting a check up front for a TV ad or your local coupon book, and there’s no guarantee anyone will come in,” said Mossler. Rather than paying a participation fee, merchants give Groupon a portion of the revenue from sales -- usually about half.

To aid in the buying frenzy, a running clock showing when the deal expires is highlighted on each deal’s page, thus provoking people to ante up and lobby their friends even harder.

Also, Groupon subscribers pay for each coupon up-front. “So, there’s more of an urge to go in and redeem it,” said Mossler. “People are more likely to leverage money they’ve already spent, and an ad isn’t as motivating to get you in the door.”

Groupon rejects many offers

Another important aspect of Groupon is that it chooses its roster of participating companies (about 35,000) carefully. “We’re very selective in the businesses we choose, and we’re turning away about seven for every one we choose,” said Mossler.

When asked what a company can do to increase its chances of being chosen for the Groupon roster, Mossler said it’s important for a company to be in a good financial position. “We’re not looking for businesses that need a quick injection of cash,” she said. “We’re directing people to the best merchants.” Also, companies should have the inventory on-hand and additional staff available to handle an influx of customers. She also recommends that companies visit the “How Groupon Works” section of the website to fully understand the process.

Rewold said Moosejaw has had no problems handling its Groupon promotions, particularly its latest one, as it has a full stock of inventory and plenty of workers for the holiday season.

Rewold said that, so far, the company’s Groupon experience has been really positive, and the company has received good exposure. As for the Nov. 9 promotion, offering a $25 coupon for $50 worth of gear, Rewold told SNEWS that 3,606 people bought in.

--Marcus Woolf

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