June 10, 2009 / 12:08 PM / 10 years ago

Virtual "tipping point" leverages group deals

— Deborah L. Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com —

Andrew Mason, CEO of The Point, is seen in this undated handout photo. REUTERS/Handout

By Deborah L. Cohen

CHICAGO (Reuters.com) - Groupon, an online marketing concept offering cut-rate deals on everything from gourmet meals to boat tours and psychic services, began as the brainchild of an unwitting entrepreneur with an eye for social change.

It happened when Andrew Mason, a graduate student in public policy at the University of Chicago with a penchant for building websites, got an offer he couldn’t pass up. Mason’s idea for an Internet site that transforms individual goals for social change into targeted group campaigns caught the attention of Chicago tech entrepreneur Eric Lefkofsky.

Mason had previously worked as a software developer at one of Lefkofsky’s start-up companies. Lefkofsky liked the Internet organizing idea so much that he convinced Mason to leave school and develop the concept with $1 million in seed money.

In January 2007, The Point <www.thepoint.com> was born; it soon began hosting causes ranging from corporate responsibility to animal rights.

“The idea … was to organize action around a tipping point,” says Mason, 28, who serves as CEO. “If you can give people a way to take action where they feel it’s actually going to make a difference, they’ll do it.”

In November 2008, Groupon emerged as an offshoot of The Point from that same basic premise as a way to juice up the fledgling company’s revenue stream.

Tapping the “power in numbers” mantra, it uses collective buying to offer consumers substantial discounts on a variety of products in a local market. A blockbuster Groupon deal works only when enough customers commit to make it worthwhile for the business doing the offering. Once users sign up, they receive a daily email touting the offer du jour. The discounts are dramatic, frequently 50 percent or more off the regular price of goods and services.

“We realized that the best way for us to monetize this technology was to show people the value of these campaigns as it relates to group purchasing,” says Lefkofsky, who serves as an advisor to the company. “The Internet is really a powerful tool for aggregating.”

Recent Chicago promotions have included a $35 coupon for $75 worth of food at a local restaurant, 40 percent off three custom-labeled bottles of wine and $75 worth of tennis lessons for $35 bucks. Customers are told at the outset how many participants are needed to make an offer fly. They provide credit card information with the understanding that if a deal craters - that’s a rarity - there is no charge. Speed is often essential as popular offers sell out fast. The tactics ring true for younger consumers already adept at online social networking.

“I definitely think it takes advantage of my generation’s tendency to forward people information using email or Face Book or Twitter,” says Mandy Burrell, a 30-year-old publicist in Chicago, who has purchased several Groupon offers. “We’re used to consuming information that way.”

Businesses pay nothing up front to participate; they negotiate the number of users required for the deal and the percentage of the overall take that Groupon receives. At a time when advertising costs are the first to get whacked from small business budgets, companies say Groupon provides a risk-free alternative to traditional marketing.

“It’s free advertising for the vendor,” says Maureen Erickson, vice president of sales in the greater Chicago area for BriteSmile, which offers teeth whitening and other cosmetic services.

“Even if (customers) don’t purchase, it introduces a new service or vendor they didn’t know was there.”

BriteSmile first began promoting its services through Groupon in February, using a deal that offered $600 worth of teeth whitening for $189 - well below the company’s previous advertised offers. It brought in 220 customers, several of who signed on for additional services. More recently, the same deal brought in more than 700 customers.

“What a concept,” says Erickson. Investors seem to think so too. The Point recently secured nearly $5 million in additional venture backing from New Enterprise Associates (NEA), funds the venture is using to help develop websites in different cities. Groupon’s reach now extends beyond Chicago to New York, Boston and Washington, DC. Atlanta, Los Angeles and San Francisco are set to launch in the near term; by the end of next year, the company, which is cash flow positive, aims to be running Groupon in 50 U.S. cities.

“People love deals and love to spread the word around,” says Mason. “They have a strong motivation to share the deal with their friends.”

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