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On Groupon and its founder, Andrew Mason

THE REAL DEAL: Groupon, the social-media-driven shopping site, is the hottest Internet start-up in town. Can it become the city’s big high-tech breakthrough?

With Groupon, Andrew Mason has brought collective dealmaking to the computer.   Photo: Taylor Castle

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Groupon logoThe history of collective online buying is a storied affair that began in the 1990s and—in its first phase—ended with a whimper by early 2001. Some of the larger players included Mercata and MobShop. “I looked at those out-of-commission sites and, to me, the reason they failed was obvious,” says Mason. “They were selling consumer goods, like TV sets or cameras, but they were competing with places like Amazon. So they couldn’t really drive the price down enough. You could get whatever they were selling other places online, you could get it cheaper, and—because they needed a week or so to get the right number of people together—you could get it more quickly other places, too.”

Mason took what he gleaned from the failed collective buying sites, switched the concept from goods to services, and married it to the basic premise of The Point. In November 2008, Groupon opened for online business. One of its original twists: In describing the offers, Groupon embellishes with esoteric tidbits (a recent deal involving the classic Music Box Theatre featured quotes from the hallmark film directors Alfred Hitchcock, John Ford, and Orson Welles). The staff’s copywriting manual is inches thick and openly based on Chicago’s improv sense of humor. (But don’t believe everything—in spite of what his online bio says, Mason does not live with 20 cats.) Recently, the managing editor of Crain’s Chicago Business, Brandon Copple, left that job to become managing editor of Groupon, where he will manage and edit content and help oversee expansion.

In a year and a half, Groupon has expanded from a staff of several dozen to 350 employees, most of them working out of the old Montgomery Ward headquarters at 600 West Chicago Avenue. One of the site’s biggest successes: selling more than 14,000 tickets to the Chicago Auto Show ($6 for an $11 value). One of its largest failures: shipping live lobsters ($84 for a $137 value). “I don’t know why that didn’t work,” Mason says. “It still sounds good to me.” Statistics show that the average Groupon user is a single female between the ages of 18 and 34. More than half the fans have college degrees, and two-thirds of them make between $50,000 and $100,000. All of that adds up to an audience many businesses want to reach. An active sales force, working on commission, recruits businesses to make the daily deals.

But Groupon has its critics. Janet Paskin, the managing editor of Bundle, a website devoted to tracking consumers and their relationship with money, recently wrote about what she called “the cult of Groupon,” citing the addictive nature of the daily hit. Paskin also noted that some followers, herself included, end up buying coupons for services they don’t need just because a deal offers such savings. While businesses look at Groupon as an easy way to expand their customer base, some critics have noted the possibility of an erosion of customer loyalty (being swayed by a deal to move on to the next restaurant or hair salon) and the danger that small businesses could be buried by an overwhelming response. In the restaurant world—favorite coupon-offering territory for Groupon—the business draws a mixed reaction. For one thing, so many coupon users were basing their tips on the discounted price of the meal that Groupon has now started reminding customers to tip based on the menu price.

“It’s like a Super Bowl commercial, in that Groupon reaches a massive audience all at once,” says Ellen Malloy, founder and publisher of Restaurant Intelligence Agency, a website that provides press information on restaurants and lounges. “But that doesn’t mean everyone should—or needs to—do one.” Malloy acknowledges that some smaller restaurants might end up being swamped with coupon diners—and even lose money on the deal—but that isn’t her largest concern. “What bothers me is the belief [by some restaurant owners] that all these people who buy a coupon and come in once are going to convert to regular diners. That may work for chain dining or very small venues, but when it comes to fine dining establishments, it’s an expensive proposition for the actual return.”

Spring, a restaurant in Wicker Park, recently offered its second Groupon deal. “This time we had more control over our expenses,” says Fletcher Harrison, general manager, “and we were able to offer diners a more Spring-like experience.” The difference between their 2009 and 2010 coupons? The second time, Spring offered a specific three-course prix fixe menu ($30 for a $59 value) and capped the number of coupons sold at 7,600. “We had to set a limit because Groupon is that powerful an engine,” explains Harrison.

Wendella Boats recently sold 19,850 coupons for their Chicago River architectural boat tour ($12 for a $25 value). “The first few days, the phones would not stop ringing,” says Craig Wenokur, director of operations. “Because we’re a seasonal business, it really helped our cash flow to get our cut of the deal up front. Plus, I will have the money for several months before all the coupons are redeemed.”

Given the low barriers to entry on the Internet, sites like Groupon are booming. Currently there are an estimated 60 competitors (some of whom try to undercut Groupon with merchants by taking only a 30 percent cut of money raised), including Living Social, YouSwoop, Scoop St., and BuyWithMe. Living Social, based in Washington, D.C., and infused with $40 million and a recently honed connection with the AOL founder Steve Case, poses the biggest threat to Groupon. But, according to Crain’s, Groupon has the momentum.

In any case, Groupon has readied itself to do battle. In March, the company brought in Rob Solomon, former Yahoo executive president, to help shape and build infrastructure. And in May, Groupon bought European rival Citydeal, adding 80 cities, 16 countries, and 600 employees to the stable. (The amount Groupon paid for the five-month-old German company is undisclosed, but Citydeal saved members $5 million in April alone.) Also, Groupon is experimenting with splintering metro areas in large cities, offering “hyperlocal” deals to various neighborhoods—a practice it plans to bring to the Chicago area soon.

“It’s an exciting time, and even though it’s unbelievable to me, I’m enjoying it,” says Mason. “Not that long ago, I never imagined being involved in anything like this. But life is full of surprises.” For the foreseeable future, Mason says he is sticking with Groupon. As for The Point, his collective action website that started all this, Mason admits that he originally thought of Groupon “as the tail that would wag the dog,” meaning that Groupon would create enough revenue to allow him to keep The Point as his main focus. But his perspective has changed. He still thinks about The Point. But now fewer than ten employees—Mason not among them—work on it. “And that’s mainly for sentimental reasons,” he says. Groupon simply offered him a deal he couldn’t resist.

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