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By Lyons, Daniel | Newsweek, November 29, 2010 | Go to article overview

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Lyons, Daniel, Newsweek


Byline: Daniel Lyons

Coupons?! Who'd have thought?

In just two years Groupon has become one of the fastest-growing companies on the Web. And the amazing thing is that it all kind of happened by accident. Andrew Mason, the 30-year-old guy who started the company, built a Web site in 2007 called The Point, where people could join forces and work together for causes they cared about. But Mason noticed that some were using his site to form buying groups and get discounts on products. That's when the lightbulb went on in Mason's head. In 2008 The Point pivoted to become Groupon, a site that is on track to generate as much as $500 million in revenue this year, according to a Morgan Stanley report.

For the uninitiated, here's how Groupon works. It finds a merchant in, say, Boston-- a nail salon, perhaps --that will offer a 50 percent discount on a manicure-pedicure, but only if at least 100 people sign up. Groupon broadcasts the offer to its subscribers in Boston, and rounds up the participants. For its matchmaking services, Groupon gets half of whatever revenue the merchant brings in. The numbers in this example are hypothetical; discounts vary, and so does the cut that Groupon collects from merchants. But on average, merchants end up collecting only about 25 percent of what they would normally make, since they cut their price in half and then give up half of what they collect. Yet merchants are falling all over Groupon because they view these deals as a new form of advertising, one that has a very big advantage over the old-fashioned kind: it actually works.

Mason didn't set out to reinvent the advertising business. But almost by accident, he's solved the puzzle that's had lots of people--ad executives, publishers, and even hotshot Web companies--scratching their heads. At some point it became clear that traditional advertising doesn't work on the Web. That's why advertisers won't pay very much for online ad space. It's also why old-guard media companies are in such trouble, and why even newcomers like Facebook can't demand very high rates for ads. What needs to change is the nature of advertising itself. That business hasn't really evolved since the days of Don Draper. Facebook and Twitter have talked in fuzzy terms about inventing new ways to reach consumers, but so far they have failed to come up with anything revolutionary. …

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