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The Tipping Point

Groupon is revolutionizing e-commerce as we know it.

Author Adam K. Raymond Illustration Matthew Hollister

IT’S JUST PAST SEVEN on a Monday morning, and 55 bleary-eyed recruits are sitting in a large conference room in a former Montgomery Ward warehouse in Chicago’s River North neighborhood. As the jittery new hires make small talk about the cat photos that inexplicably line the walls, an unassuming young man in jeans and a tight blue T-shirt walks into the room. His name is Andrew Mason, and he’s the 30-year- old founder and CEO of what Forbes has named the fastest-growing web company in history: www.Groupon.com.

Launched in November 2008, Groupon is on pace to record a billion dollars in sales by the end of this year, reaching that milestone faster than any company before it. (www.Priceline.com, which hit a billion in two and a half years, is number two.) Groupon achieved its startling success with a simple business model that combines the two things it’s named after: groups and coupons. Each day, in its 236 markets around the world, Groupon emails a deal to a list of subscribers who have until the end of the day to buy into it. Offering deep discounts on services like massages and helicopter flying lessons, deals only kick in, or “tip,” if enough subscribers agree to buy them. This happens on 98 percent of Groupon’s deals, leaving everyone happy: The consumer scores a deal, the business attracts new customers, and Groupon makes money-typically 30 to 50 percent of the deal price.

“Welcome to Groupon,” Mason says to the recruits, before launching into a speech about the history and mission of the company. Then he turns to an eight-foot TV screen and introduces a video. “This is really important to what we do here.” He hits play, and a slightly younger, pudgier and scruffier version of himself appears on screen. “Hi, I’m Greg,” it says, “and basically I want to rent you a monkey.” It’s a promotion for “Monkey for a Week,” Groupon’s gag April Fool’s Day deal from this year. After a minute and a half of absurd dance moves and bad sales pitches, the video ends, the newbies clap, and “the tone for the rest of an employee’s time here is set,” says marketing manager Julie Mossler.

“From the beginning we’ve tried to build this company in a way that entertains us,” Mason says, two weeks after that training session. That’s been a theme throughout his life. From an early age, the tall, baby-faced chief executive has always shown twin creative and entrepreneurial streaks. At 15, he started a bagel delivery service in his native Pittsburgh. A few years later, he earned a music degree from Northwestern and spent his early 20s trying to make it big with a band he’s described as part punk, part Beatles, part Cat Stevens. When the band failed to break through, he launched a website called The Point in 2007 with a million dollars in angel capital. The point of The Point, which is still active, is to organize groups of people behind specific charitable causes. Once a certain number of users has committed to donating their money or time to an effort, it’s undertaken.

Unlike Groupon’s deals, however, tips were elusive at The Point. “It was a big, abstract idea that wasn’t getting any traction, so we tried to focus on one specific way that people were using the site,” Mason says. “Group buying seemed the most promising.” So he went down to a pizza place in his building and asked the owner if he wanted to participate in a deal. The deal was for two pizzas-a $20 value-for $10. About 15 people, most of them Mason’s friends, bought that first Groupon, enough to convince him to keep going. He slowly expanded his mailing list and added new businesses.

A few months later, Mason hit send on the deal that made him realize Groupon could be big. “There’s this sensory deprivation tank in Chicago,” he says. “It’s a tub of body-temperature salt water, and you just kind of float in it. We thought it was funny and decided to run a deal for it. Five percent of our mailing list ended up buying it. It was an eye-opener because it made us realize we could use this thing to expose people to new and unusual things in their own cities.” The deal, as it were, tipped.

In the two years since Groupon’s launch, it has grown from seven employees to 2,200. What began as a service only in Chicago has expanded to 236 cities in 29 countries. The 5,000-person mailing list that saw Groupon’s deal for the saltwater tank has exploded into a 18 million–strong subscriber base as of mid-September, at which point that number was growing at the torrid pace of a million per week. Even more impressive, back in April, the 17-month-old company raised $135 million in funding, resulting in a $1.35 billion market valuation. The only company to reach $1 billion faster was YouTube, but Groupon did it during the worst recession in recent history.

“We’re the fastest-growing company ever because we’re the first real revolution in e-commerce since the web has matured,” Mason says, adding that Groupon is to web 2.0 what eBay and Amazon were to web 1.0.

One business that has landed a Groupon deal is State Street Barbers, a small barbershop chain with four locations in Chicago and one in Boston. One day last June, Groupon blasted out a deal offering subscribers a $27 haircut for $13. State Street Barbers netted 2,746 new customers. Ultimately, Brian Collie, a co-owner and founder of the fledgling shops, brought in only $6.50 for each haircut (the other $6.50 went to Groupon), but he considers it money well spent. “We really wanted to use Groupon to drive trials and to introduce our business to new customers,” Collie says. “It’s a great mechanism for getting people in the door for the first time, and it leaves it up to us to give them a good experience so they’ll come back.”

But while Groupon says every business is vetted to ensure it can absorb the sudden surge in demand and the months of potential losses on deeply discounted goods and services, not all partners have been satisfied with their experiences. Posies Cafe in Portland, Oregon, was nearly sunk by a Groupon promotion launched in March of this year. In September, owner Jessie Burke took to her blog to warn other businesses against working with the company. “After three months of [nearly a thousand] Groupons coming through the door, I started to see the results really hurting us financially,” she wrote. “There came a time when we literally couldn’t make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign.” Burke ended up having to dip into her savings to cover the shortfall.

Still, Posies Cafe, it seems, remains in the minority. Many other businesses are clamoring to get a Groupon of their own. State Street Barbers, for one, is currently in expansion mode, and as Collie’s shops hit new cities, he knows of at least one way he’ll bring people in. “We’ll definitely be using Groupon,” he says.

ADAM K. RAYMOND, a writer for MTV’s Clutch blog, wishes he could buy a Groupon for Fruit Gushers.

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