February 15, 2010
by David Gelles
Late last year Marina Nelson, a marketing consultant in San Francisco, returned from a visit to Yosemite National Park with a very dirty car. “It was filthy,” she remembers. “There was mud caked in the licence plate and the carriage.”
So Ms Nelson appreciated the serendipity when just days later, she received an e-mail offering a 57 per cent discount on a luxury car wash: a wash, wax and interior clean that would normally cost $70 was just $30.
The offer was from Groupon, an e-commerce startup that pairs local businesses with bargain-hungry consumers. But there was a catch: the offer was only good if at least 20 people signed up. For the car wash to offer such a steep discount, it had to be assured it would receive an influx of new customers.
Groupon offers one such deal a day in more than 40 cities across the US. Users sign up to receive a daily e-mail from Groupon, and the company recruits local businesses willing to trade deep discounts for an influx of new customers.
In the case of the car wash, Groupon delivered. By the end of the day 612 people had purchased the offer. The car wash, Keatley Detail, received a sudden influx of business over the next few days, and Ms Nelson took her Lexus SUV in for a clean-up soon after. “It was something that I needed anyway,” says Ms Nelson. “So when a discount came up, of course I’m going to take it.”
Groupon is part of a new wave of companies reviving so-called “group buying”, using the collective purchasing power of a block of consumers to negotiate better rates from goods and service providers. Where one crop of dotcom startups failed 10 years ago, Groupon and others look to succeed by harnessing the power of the internet and focusing their efforts on local goods and services that otherwise are rarely marked down.
“[Group buying] has shown itself to be very compelling from a marketing standpoint,” says Sucharita Mulpuru, a retail analyst with Forrester Research. “It resonates with people and gets them to make a purchase quickly. And it’s a great way for businesses to drive new customer acquisition.”
Groupon’s early success has inspired imitators. LivingSocial Deals and BuyWithMe are offering similar programmes in cities around the US. At least five similar companies have started up in Europe, including DailyDeal.de in Berlin, and Wowcher in London.
Group buying is not a new concept. Ten years ago companies such as Mercata and MobShop tried to leverage collective buying power to achieve discounts on everyday commercial goods like electronics and sports equipment.
But e-commerce was still a novelty, fewer people were online and, critically, the discounts they could achieve through collective buying were not much better than shoppers could find at Walmart or Costco. After taking millions of dollars in venture capital, Mercata and MobShop went out of business as the dotcom bubble burst.
Andrew Mason, Groupon chief executive, thinks his company is poised to break the mould. “For customers, we’re a great way to get a deal on something they already love or want to try,” he says. “For businesses, we’re hands down the best way to get customers through the door, which for small businesses is the difference between success and failure.”
Finding businesses willing to play along is key to Groupon’s success. It maintains a sales force that looks for small businesses willing to participate, then negotiates a deal to offer to consumers. But keeping up the quality of the deals will be key to Groupon’s long-term success. Many businesses take a financial hit when they offer a deal through Groupon, and may be disinclined to repeat the offers too often. “The biggest challenge is sustaining the model,” says Forrester’s Ms Mulpuru. “Every day needs to be a homerun for them to be a huge success.”
One day Groupon sold 1,600 skydiving coupons for Chicago Land Skydiving, delivering a 25 per cent rise in annual sales for the skydiving outfit in just 24 hours. In another promotion, Groupon offered discounted memberships to the Art Institute of Chicago. Five thousand people signed up, a significant boost for a museum that previously had 85,000 members.
And because the deal is only activated if enough people sign up, users are encouraged to spread the word to their friends. Groupon makes this easy by linking to Twitter and Facebook, and relies heavily on this word-of-mouth advertising.
By keeping between 30 to 50 per cent of each sale, Groupon has been profitable almost from the start. The company has dealt with 1.8m transactions since the company was founded just over a year ago, saving consumers more than $85m (€62m, £54m). Mr Mason said his company was on track to do $100m in sales this year.
Where Groupon has succeeded in obtaining deep discounts for restaurants, entertainment and simple services, a San Francisco-based startup is applying the same model to a much pricier item: residential solar installations.
One Block Off the Grid, or 1BOG, rounds up groups of homeowners in a city and matches them with a solar installer offering a discounted rate. By serving as a matchmaker, 1BOG aims to demystify the complex solar installation process for buyers, and brings a hefty chunk of new business to the installers.
Dave Llorens, chief executive, says his group has become an effective intermediary between consumers and the installers, who have not standardised their rates and sales pitch.
“In [the solar] industry, you have to do it in a group fashion because that’s how you reach the tipping point where people realise solar is not only for rich environmentalists,” he says.
“We should be at a massive adoption rate for solar in the US . . . but the sales process for residential solar installation is not designed to scale.”
Like Groupon, 1BOG is enjoying early success. The company operates in 10 cities and has signed up more than 600 homeowners for solar installations through 16 different campaigns. Installations are discounted about 15 per cent for each home. The company takes a flat referral fee from the installer, and 25 cents per watt installed, or about $1,000 per home.
Both Groupon and 1BOG are backed by New Enterprise Associates, a venture capital group that specialises in consumer internet and clean technology investments. NEA gave Groupon $4.8m in early 2008 and followed up last December with a $30m second round co-led by Accel Partners, one of the early investors in Facebook. Last week they gave 1BOG a $5m investment.
Ravi Viswanathan, a general partner at NEA, says his firm was bullish on group buying.
“There’s a viral nature to it that can really drive adoption,” he says. “It’s a self-fulfilling prophecy . . . and the possibilities are endless.”
1BOG is already running pilot programmes to test the model for home retro-fitting, and conversions that turn Toyota Prius petrol-electric hybrids into plug-in electric vehicles.
“The model clearly extrapolates pretty well to any big-ticket home improvement,” says Mr Llorens. “We’re just scratching the service of what new social technologies can do with this.”
