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Groupon

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Group + Coupon = Groupon Groupon.com: The Power of Collective Buying Ish Bhanu Economics 106T 12/02/2010 603-572-932Bhanu 2 Introduction Groupon is a one-deal-a-day website that brings an individualized deal to over 300 distinct geographic locations across North America, South America, and Europe. Because of a business plan dependent on the power of collective buying, Groupon is able to negotiate significant beneficial deals for consumers while businesses enjoy great exposure and if the Groupon is “tipped”, then the benefit of a massive influx of new clients. Groupon was not able to have such success without problems arising. Several Groupon clones have quickly sprouted up in markets around the globe and are creating a host of problems that Groupon must deal with. Groupon’s CEO Andrew Mason and his team of innovators now must constantly think about staying on top and competing in an industry with very minimal switching costs while also maximizing profits to please investors. A Historical Look Back CEO and founder Andrew Mason launched Chicago-based Groupon in November 20081. He modeled the website around a concept developed from another website, The Point. The Point was a nonprofit company whose website relied on the idea of collective buying power. Once enough people committed to donating money, they would be charged for their donation. If the site failed to attract enough donations, the deal fell through and no one was charged. This idea helped The Point community come together to solve problems that were too difficult to solve alone. Mercata was the first company to seriously apply the idea of collective buying power to consumer products in 20012. Though not destined to survive for 1 Keane, Meghan. "Q&A: Groupon's Andrew Mason | Econsultancy." Econsultancy | Community of Digital Marketing and Ecommerce Professionals. 2 Dec. 2009. Web. 01 Dec. 2010. <http://econsultancy.com/us/blog/5017-q-a-groupon-s-andrew-mason>. 2 Coburn, Lawrence. "Groupon CEO Andrew Mason Talks Growth, Clones, and Why Groupon Isn’t a Coupon Site." The Next Web | TNW Is the International Source for Internet News, Business and Culture. 24 Mar. 2010. Web. 01 Dec. 2010. <http://thenextweb.com/location/2010/03/24/groupon-ceo-andrew-mason-talks-growth-clones-groupon-coupon-site/>.Bhanu 3 long, their demise was not due to their business plan, but with whom they were competing against. Groupon CEO Andrew Mason said it best when he attributed this failure to their lack of diversity in their product set and competing against big warehouse stores, whom they did not have the financial backing to adequately compete with3. Mercata also had a problem with delivering their discounts, most consumers seeing them only a week later. Mason asserted that Groupon had the resources and the finely tuned business model to avoid these pitfalls that had plagued Mercata from the start4. Groupon Business Model In a strong effort to succeed where Mercata had failed and to leverage the concept gained from The Point, Groupon carefully crafted their business model. It was simple, clean, and easy to use. There was to be one deal each day in each participating city. This would allow the company to minimize distractions associated with other large diverse ventures. The products and services offered were also to vary greatly so as to minimize the accumulation of thrift shoppers who would simply live from Groupon to Groupon5. The idea was to help people experience something they never though that they would do or maybe were on the fence about and needed a little incentive to try it. The way Groupon functioned was modeled on the idea that The Point pioneered. In order for a deal to have become active a certain number of consumers had to commit to the deal6. Once that number had been reached and had passed “the tipping point” the deal became active and those who had committed earlier were 3 Coburn, Lawrence. "Groupon CEO Andrew Mason Talks Growth, Clones, and Why Groupon Isn’t a Coupon Site." The Next Web | TNW Is the International Source for Internet News, Business and Culture. 24 Mar. 2010. Web. 01 Dec. 2010. <http://thenextweb.com/location/2010/03/24/groupon-ceo-andrew-mason-talks-growth-clones-groupon-coupon-site/>. 4 Ibid. 5 "About Us." The Daily Groupon | Coupons, Discounts, and Deals on the Best in Seattle. Web. 01 Dec. 2010. <http://www.groupon.com/about>. 6 Carpenter, Steve. "A TC Teardown: What Makes Groupon Tick." TechCrunch. 02 May 2010. Web. 01 Dec. 2010. <http://techcrunch.com/2010/05/02/teardown-groupon/>.Bhanu 4 charged and it was then open for others to buy7. So, for example, if there was a deal for yoga downtown the number of committed users might be 100. Once 100 people said they would buy the deal, the deal became active and those 100 people were charged and received their Groupon and other people could instantaneously buy it. As soon as a consumer bought the Groupon, the certificate was e-mailed to them and it could generally be redeemed the next day. Because of the power of collective buying, Groupon was able to secure significant discounts between 50%-90%8 from various establishments, such as restaurants, salons, clothing stores, and sporting venues, for their customers. It was beneficial to the businesses because if their Groupon became active by passing the “tipping point” of committed consumers, then the business got guaranteed business. The businesses also benefited from the fact that a consumer who walked in with a $50 Groupon would typically spend more than $50 to extract the full value of the Groupon since change was not available. These 50%-90% discounts are the reason why Groupon was able to bring in revenue in excess of $100 million9 within two years of launching. Each featured business negotiated with a Groupon representative prior to be listed on the site. Through heavy negotiating a Groupon representative would hammer out a contract, which was typically just barely above marginal cost for the business in which the Groupon company would take 30%-50%10 of money paid for the Groupon and the business would take the remainder. For


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