December 31, 2012

Groupon’s Biggest Deal ever by Frank Sennett

Groupon’s Biggest Deal ever by Frank Sennett

The inside story of how one insane gamble, tons of unbelievable hype, and millions of wild deals made billions for one ballsy joker.

Andrew Mason tried so hard to make his friends laugh in high school that he drove his exasperated freshman math teacher to tears on more than one occasion. Absolute commitment to a bit regardless of audience response remains a hallmark of Mason’s humor. But long before he became the Andy Kaufman of CEOs, his friends saw him as the go-to-guy for outrageous stunts.

One of the standard shorthand references reporters employ to illustrate Andrew Mason’s improbable rise to CEO of one of the planet’s hottest online companies is to note that he graduated from Northwestern University in 2003 as a music major and went to work with indie-rock producing icon Steve Albini at his Electrical Audio recording studios in Chicago. But don’t pigeonhole Mason as a musician who got lucky. He coded web sites as a teenager, and enrolled at Northwestern in engineering before changing his major. Prior to creating Groupon precursor The Point, he attended grad school in public policy at the University of Chicago because he wanted to get funding for a Website called Policy Tree.

He knew nothing about the world of venture capital, but he had studied, a site funded by the Wharton School at UPenn. Why couldn't Policy Tree be the FactCheck of the university of Chicago? he wondered. Mason was so determined to pursue his vision that he enrolled in graduate school because it was the only way he could think of to secure backing for his brainchild. The idea behind Policy Tree was to give people on opposite sides of a given public-policy issue an online tool they could use to find common ground and ultimately act together for the good of society. Before mason got into the grad program in U of Chicago, he got a job in 2006 Jan. as a FileMaker developer for one of Lefkofsky’s companies, Echo Global Logistics, which uses online tracking and analytics technology to help business move cargo more efficiently.

Within a few months of starting with Echo Global, Mason had shifted to InnerWorking which is another firm run by Lefkofsky, which is also housed in the same building. Having distinguished himself with both hard work and creative thinking, Mason was now the lead developer tasked with redesigning the print technology interface for InnerWorkings. That Fall he decided to enroll at the U of C, but Lefkofsky had other plans and was determined to keep this new star around. If it was money Mason wanted, no problem. InnerWorkings was prepared to rise his salary from the low five figures to $200,000. Amazingly, Mason was unmoved by the offer. However, he agreed to come back to InnerWorkings one day a week to help hand off his projects.

Policy Tree wasn’t the only idea for a site vying for mason’s attention. he also wanted to launch one that would improve the world by harnessing the power of collective action. The core idea was for users to post campaigns for collective action on the site - whether it was to start a boycott to force a cell-phone company to change onerous contract provisions or even to finance a climate-controlling glass dome that would turn the city of Chicago into temperate paradise, as Mason famously lobbied for soon after The Point launched. Lefkofsky liked the Web site idea, but he was perhaps even more interested in the fact that Mason was spending ten hours a day online. The notion that a young guy who thought a lot like Lefkofksy could serve as his guide to this new world was an intoxicating one, and it could be worth serious money.

Mason’s five-page outline for his site was better than the verbal pitch, so much so that Lefkofsky was ready to invest $1 million dollar, if Mason can skip his graduate study and dedicating for this Web Site. Mason left U of C and joined the new company, The Point.

After working for one year and spending all of the $1 million and other VC’s investment, there was no sustainable path for The Point. The board of directors started pressuring Lefkofsky to the pull the plug. These were the same directors who sat on the boards of his companies InnerWorkings and MediaBank, an online media-buying company that he and Keywell (co-founder for The Point as well) has founded. Those firms look like even more of a dog by comparison.

Since there was no revenue coming in from the new company, The Point, Lefkofsky pushed harder to sell advertising on the site, mason finally blew up at him. “What is wrong with you? We are getting thousand visitors a month and we’ll make nine dollars a month in advertising. Why would I do that?” Mason asked. “You just need to see what it feels like to do something that results in making money”, Lefkofsky insisted. Mason finally agreed to create some ad positions on The Point’s blog but neither party left the argument a winner, and by August it was clear that hosting ads wasn’t going to generate meaningful revenue.

While those options were dead ends, Lefkofsky’s capitalist reeducation camp did ultimately lead mason and the other young idealists on his team to seek a non-adversarial business model, one in which every party would leave with something of value. To get to that epiphany, the team closely examined how members were using the site. Interestingly, a few of them had attempted before to persuade merchants to offer a discount if a certain number of users agreed to say, eat dinner at their restaurant. Group buying had been tried on the Internet many times before, So what was going to do that was different?

Mason approached the issue from the perspective of the consumer: If he could get a daily email that highlighted one great business at an even better price, he’d often be moved to buy. But the key insight which gave rise to Groupon, is actually amazingly simple and like most great business models, makes you end asking yourself,” Why didn’t I think of that ?”

What Mason and his team eventually figured out is this: Every day local merchants have unused inventory. They have food that goes to waste, appointments that don’t get filled. They need like more business, more customers. And to get more customers, merchants have to entice them to come in, which often means offering them a discount. But for most merchants, discounts and sales are catch-22. You only want to lower price, if you know you are going to get new customers. Until Groupon arrived, this was an unsolved equation. Groupon applied the logic of tipping points and said to merchants: “If we can get you one hundred customers, will you give them all 50% off?” That created an immediate connection between the incentive offered and the merchant’s desired result. Overnight a new marketplace was formed.

Going forward, a Groupon would be a deal offering typically 50% or more off the price of a merchant’s goods or services. Shop owners would usually get half the proceeds from each Groupon purchase and they would cover the coupon value as well. So if a Groupon offered twenty dollar’s worth of a service for ten dollars, Groupon would take five dollars - half of the base purchase price - from every deal sold. The merchant would get the other five dollars, but would have to provide twenty dollars’ worth of value to each customer.  Factoring in Groupon’s cur and the coupon value, then, merchants would be taking 75% hit off the full retail price on every deal sold. It was a margin killer in the short term, but business hoped the promotions would pay off by converting deal buyers into long-term customers more effectively than direct mail or old-fashioned newspaper coupons could do.Groupon wouldn’t be the best marketing vehicle for every merchant type, but in general the trick was to structure offers so that the expense was justified.That’s how once-in-a-decade, market-transforming businesses are born.

[it went well with local merchants in Chicago and when they introduced it in Boston, there was already a con firm selling the same idea that Groupon started with. Since the first movers has many advantages, Groupon went into other cities in a faster mode. When they attempt to go to Europe, there is a con company who doing same business model and already in the market. That company has been doing same approach with eBay as well. When eBay became famous the same firm started in Europe with the same idea. eBay ended up buying the company. Same thing happened here where Groupon bought the European firm to expand in Europe.

The con company’s operating principle is quite simple - follow the growing web companies in US and copy them in Europe. When the original company wants to expand to Europe, sell the con company and make profit.

In the fast growing business, yahoo approached to buy the company for $3 billion, but Groupon rejected that idea. Google raised the bar to $6 billion which put Groupon folks in catch-22 dilemma. As per their growth chart, Groupon company will be $10bn to $20bn company in few years; if so, why to sell to Google for $6bn? Finally company decided to reject that offer as well and decided to initiate IPO to become a standalone company.

Initial price was $20, but went up to $24 after a month, but thereafter, it was sliding down fast and current stock price is $4.73.

Groupon business model can be copied by anyone. Social media companies like Facebook, Google could sell such discount coupons as well. Amazon is also targeting similar idea. Was the idea of rejecting $6bn Google offer was insane one?]

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