Discount Deals Drive Groupon's Revenue

Some websites targeting the local markets have nailed their concepts so well, they've inspired hosts of foreign "knock offs" that mimic them to a very precise degree.

That's the experience that crowd-source coupon provider Groupon's CEO Andrew Mason shared Wednesday, the final day of the BIA/Kelsey Marketplaces 2010 conference in San Diego.

Mason's Chicago-based company originally started as a way to gather people on the Internet to derive the best group deals. It has morphed into a site that offers local, daily deals for consumers in 46 markets that target 3.5 million subscribers and to date has sold 2.7 million "Groupons." The growth pace in Chicago (325,000 subscribers) has made the site larger than the Sun-TImes newspaper and on target to top that of the Chicago Tribune, the largest daily in the city, Mason said.

Mason presented screen shots of Russian-based sites that clearly knocked off the site's design, right down to the cascading stylesheet. And he estimated there are now about 150 "Groupon knockoffs all over world."

That imitation, Mason surmised, is because merchants want more access to what Groupon promises. "We have a huge waiting list wanting to be featured," he said. "The supply is limited to one deal a day."

In the end, according to Mason, the types of businesses that end up running with Groupon competitors are those his company ends up turning away. "What differentiates Groupon from those that have come before and after is the quality of the  businesses we're featuring," he said. His company makes money by splitting the revenue from the offers purchased with the advertiser.

Groupon has adopted a city guide approach to deciding what daily coupons to offer those who sign up via e-mail, he said. The offers themselves are an eclectic mix ranging from tattoos, Ferrari and motorcycle rentals, to one current potential item that has yet to be featured -- bounty hunter.

"I don't know what that means, but we'll do it anyway," he said.

Groupon's biggest boost came before Mason even spoke via moderator  Bobbi Loy-Luster, VP-senior analyst of conference organizer BIA/Kelsey.

The moderator told of her hometown experience as a Groupon customer in

Charlotte, N.C. The Groupon purchase of a New Year's Eve package led her to a

local salon that had offered a $50 manicure and pedicure via Groupon at 50% off.

Loy-Luster's interviewed the woman, identified only as "Kimberly of Nail Spa," using a portable video camera and played back the interview for those in the San Diego audience.

In the interview, the woman related she had tried "everything" in the prior years, ranging from the newspaper to coupons. The investments "did not work for me," the spa co-owner said.

She tried Groupon at the urging of a good client. After purchasing a number of Groupon offers herself, "Kimberly" eventually contacted Groupon and comfortably crafted her offer via telephone and e-mail contacts with the company.

The deal resulted in 350 "mani-ped combos" the woman said. While she estimated 40% would probably be one-time-only clients, the remainder have become repeat customers.

"I've made my money back," she related via the video playback. "We would use it again."

Her only complaint was that Groupon limits offers and frequency.

"Next to Facebook, it's pretty awesome," she said, adding jokingly in the on-camera interview that she was single and wondering out loud about the availability of the CEO.

The Groupon CEO, while not addressing his eligibility, did present his theories about why the Groupon technique appears to work.

First, the offer is risk-free for the advertiser. They don't pay out of pocket for being featured, unlike other types of offers that typically will charge a fee per volume of offers sent. Groupon collects all the revenue, pockets 30%-50% percent, then distributes the remainder to the business.

The advertiser benefits from the customer behavior. The typical experience is that customers either spend more on other services or goods, and ends up being a repeat visitor, Mason said.

"It's super low risk for them," he said. "The tipping point for them is they don't have to get involved unless we hit that number. There are no out of pocket costs. They never send us money.  We send them money. Every dollar is attached to a customer in the store."