Last updated: December 1, 2010 6:35 pm

Groupon’s runaway success with coupons

Groupon’s rapid ascent began some four years ago in Chicago, when Andrew Mason, its chief executive, became frustrated with a $175 cell-phone contract termination fee.

Mr Mason, who had just started at the University of Chicago after winning a scholarship to study public policy and the internet, became convinced that social networks could provide a network to enable similarly disgruntled customers.

“I thought that if there is a way that all the people that hate this could come together, and say ‘no, we won’t do this’, if we join together, we would become so large that no one could stop us,” he told the FT in a recent interview on the meteoric expansion of his online group coupon site.

With backing from Eric Lefkofsky, a Chicago-based serial entrepreneur, Mr Mason dropped out of graduate school and set up ThePoint.com, a social action networking site, whose early projects included enabling workplace union organising, and joint fundraising efforts for ideas such as painting murals on abandoned buildings. ThePoint, launched in September 2007, also included a joint discount buying capacity, which proved the site's most lucrative feature.

“It seemed like a good idea, so we decided to launch Groupon sort of as a side project,” recalls Mr Mason, an accomplished classical piano player who initially studied music and technology at college. “I was always a geek, playing around with computers.”

Groupon’s first deal of the day, in late 2008, was a two-for-one pizza deal at the bar and restaurant on the ground floor of their office building – the former warehouse of the Montgomery Ward, the now defunct catalogue retailer that was one of the retail giants of the early 20th century. Groupon’s seven staff used printed post cards and signs in the elevators to drum up the required number of customers for the pizza deal. Mr Mason recalls that about 20 people signed up, “Most of the people who bought them were people in our building whom we went and stood behind,” he recalls.

Groupon spent six months expanding with local merchants in Chicago, then moved into Boston in early 2009 and into New York in May 2009. Its business model of taking a share from each completed sale brought it to early profitability, while merchants responded to the fact that they only paid for customers who came through their doors, which makes Groupon more cost effective than either advertising or conventional coupons .

It is now in 300 cities internationally, 130 of them in the US, and 2,700 employees, just under 1,000 in the US. Its acquisitions have included similar sites in Berlin, Japan, Russia and Latin America. Mr Mason says the company has sought to retain a relaxed and open culture – reflected in his own relaxed manner – which includes having no vacation limits, an idea picked up from Netflix, the video rental company.

Groupon is also unusual in having been created in Chicago rather than in Silicon Valley or the East Coast, with Mr Mason, a native of Pittsburgh, saying he had no awareness of venture funds of angel investors until he through “happenstance” met Mr Lefkofsky.

Mr Mason, who celebrated his company’s initial success by buying himself a Steinway grand piano, argues that the site’s deep discounts have also reached people who would not have used coupons in the past driven in part by bringing in participants such as the Art Institute of Chicago, the Whitney Museum and award-winning restaurants.

“There is a demographic of people using coupons that would never be caught dead using a coupon,” he says. “Time will tell, but I think we’ve succeeded in making coupons cool.”

In recent weeks it has also run its first national, rather than local, promotions for both Gap and American Apparel, the US clothing stores. But Mr Mason argues that Groupon’s differentiates itself with its focus on local neighbourhoods and local merchants, rather than entire cities or national merchants.

“There isn’t a really great market place for local businesses to deal with imbalances of supply and demand, and I think that’s what Groupon can become. I think we can change the way that people buy from local businesses in the way that Amazon changed the way people buy products.”

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