Groupon.com: Internet Fairy Tale or the Next Fabulous Flameout?

Sept. 20, 2010— -- On a recent summer day at Chicago's "Kid's Table," manager Anastasia LaBorde found her business inundated with phone calls.

On a typical day at the store, which hosts children's cooking classes, LaBorde receives a handful of calls from curious would-be patrons and clients. But on this day, by midafternoon, she'd received more than 100 calls.

"I can't answer the phones enough," she said, laughing. "By the time I end one phone call, I get another one."

The barrage of new interest in the cooking school came after the Kids Table was featured on the sizzling-hot website Groupon.com. Groupon, a Chicago Internet startup, offers one heavily discounted online deal every day to customers around the globe.

"Every single phone call today has been a Groupon pretty much,'' said LaBorde. "We have only been open for about 3½ years now, so we haven't done too much advertising, and this is the best possible way to go about it. [It's] completely free, and everybody's signed up for Groupon, so it's been great."

By the end of the day, when the Kids Table was showcased on Groupon, the cooking school had sold 3,470 deals through the Groupon site, which offered a class for $12, a steep discount from the regular $25 price. LaBorde said the discount would turn the deal seekers into loyal customers. "We rarely have people who come in once here and don't come back, so I'm sure we're going to have lots more people coming in now."

Not even two years old, Groupon.com, at this stage of its business development, is growing faster than Facebook, Amazon and Google, in terms of total revenue.

With its high-tech twist on an old medium, discount coupons, tweaked for the Twitter set, Groupon has more than 11 million active subscribers and has saved clients more than $488 million, according to the company.

Not Your Grandma's Coupon: Purchase Power Comes in Numbers

"We're launching about 200 cities in this next year,'' said Andrew Mason, the 29-year-old CEO and brains behind Groupon. "We have been called the fastest-growing company ever."

A musician by training, Mason played in a rock band and was working on some struggling websites when he came up with a "killer app" for selling coupons to groups of people.

Groupon was born in the fall of 2008, with seven employees. Barely two years later, it now has about 550 people on its payroll, Mason said, with 25 new hires training at Groupon's headquarters weekly.

The concept is simple. "Every day we e-mail millions of people around the world one deal on a great business in their city," said Mason. "It could be on a restaurant, a spa, theater tickets, a sensory deprivation tank, just about anything that's interesting to try."

Takers buy a voucher through the site, usually for half off the value of the item, and up to 70 percent off. The voucher can be used like cash at the business.

Every Groupon offer has a time limit, usually 24 hours to buy the coupon. Coupons are typically good for a year from the date of purchase.

The catch? Each offer requires a minimum number of customers, a tipping point, before the deal is on.

"If you buy more lettuce, then you get it at a better price," Mason said. "It's the same thing with Groupon -- if we can channel the entire collective buying power of a community behind one deal, then we can negotiate a better price on something than if one person was doing it alone."

Merchants do not have to pay Groupon up-front for the privilege of being featured. The company makes its money by splitting the take from the coupons it sells with the businesses that supply the goods and services.

Erin Donahue, a faithful Groupon customer who buys a deal at least once per month, started using Groupon about a year ago. "A friend was organizing a girls' group dinner out, and she forwarded the e-mail for a sushi Groupon."

Coupons for Sky-diving in Detroit, Chemical Peels in Philadelphia

Donahue, 27, lives in New York and is a typical customer. "We find [our customers] because it's a great experience," said Mason. "[Businesses] love us because it's a great way to get new customers. And it's a type of customer that traditionally is really hard for them to reach."

Seventy percent of Groupon clients are women, age 35 and younger, living in cities, according to the company, which is privately held.

"It was free to sign up," Donahue said. "It was a place we would go anyway, and you know we saved money and it was fun."

For small businesses like Chicago's upscale Spa on Oak, Groupon's appeal is more about advertising, more about reaching new eyeballs. "I would say 60 percent of the people who come in here through the Groupon didn't even know I was here,'' said Richelle Ciluffo, owner of the spa. "It put me on the map."

Groupons have peddled zip-lining in Santa Cruz, Calif., sky-diving in Detroit, chemical peels in Philadelphia and dancing in Dallas.

Culture is a hot-seller, too. From the King Tut exhibit in New York to the Joffrey Ballet in Chicago. Last month, Groupon sold its first big national coupon: $25 for $50 worth of clothes at the Gap.

Mason said the Gap coupon got 450,000 takers -- and the volume crashed the Gap's server. Nonetheless, Groupon said the Gap promotion yielded $11 million in sales.

Dotcom Boom Reincarnate?

Like the early dotcoms, Groupon cultivates a hip, funky vibe. The average age of employees is 25. Ping-Pong is encouraged. Headshots of customer service reps -- recruited from Chicago's improv scene -- line the walls.

"They think quickly, but they also have a good sense of humility. They have a good sense of empathy,'' said Dan Jessup, the company's human resources director, of their employees. "They understand how to relate naturally and they do so with a sense of humor."

Meetings are held in a space that strongly resembled an aging teenager's bedroom, which, oddly, included a stationary bicycle that played the Sade song "Smooth Operator" when it was working properly.

Coupons for the Cool Crowd

Groupon advertising reads more like satire you'd find in The Onion, rather what you'd read in typical business copy.

For a hair treatment in Tucson: "How to feel terrible and look great doing it."

For cheap cocktails in Seattle, "A reader challenge: What's in a fireside chat?"

And, "How to order yogurt the rude way."

"The e-mails are hilarious,'' said Donahue. "I think that that's part of their voice, part of their company personality that shines through."

And with the appeal so obvious to so many, the competition is coming on strong, and not just in the United States. In Russia and China, clones have ripped off Groupon's model, right down to the color scheme of its website.

Stateside, companies like yelp.com are moving in on the market.

"We've seen something like 500 businesses clone the exact idea of Groupon," said Mason. "Most of them end up being like a knockoff, you know a Groupon knockoff is a lot like a Gucci knockoff or an i-pod knockoff. It's not the same as the original."

Groupon may be riding high now. But there are many tombstones for dotcom hot properties past, such as Pets.com, eToys.com and Netscape, once promising Internet companies that grew fast and flamed out.

"[I] take it with a grain of salt," said Mason. We're kind of like the 'N Sync of websites, where we might have some record, but we're not better than the Beatles. It's more of an artifact of the times in which we live."

Unlike so many dotcom wonders, Groupon is already turning a profit.

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