Grouponan Ordinary Company for a Revolutionary New Era

Groupon is a fundamentally new phenomenon—a Net-enabled conventional company. It is the signature company for a new era, in which technology companies are, quite remarkably, becoming ordinary. Another way to think of it is that ordinary companies now have no choice but to become technologized. Two-year-old Groupon is emblematic of an age when technology competence will increasingly dominate business, and the only way to succeed will be by exploiting a direct connection to customers via the Internet. Its success is undeniable—with at least $2 billion in expected revenues this year, it is probably the fastest-growing company in history in financial terms.

Groupon is the leader of an industry that has become gigantic almost overnight—the so-called “daily deals” business. Such companies, which also include LivingSocial and literally thousands of others, typically offer consumers discounted products and services from local businesses if they respond quickly. Venture Beat says an astonishing 3,000 daily deal companies have emerged in the past two years or so, including 1,000 in China, 900 in Europe, and 600 in South America. The burgeoning industry has also attracted established comanies including Google, Amazon, and OpenTable. In keeping with the torrid pace of change, some big companies have already entered and then given up, including Facebook and Yelp.

Groupon is unequivocally an Internet business—its consumer contacts almost all take place online. It gets customers through email lists and online advertising. Then it distributes its offers via email, with follow-up on its Website.

On the other hand, the way it acquires its clients on the retail/advertiser side is achingly conventional, labor-intensive, and costly. Armies of salespeople fan out across the cities where Groupon operates, glad-handing small-business owners and convincing them of the opportunities to be found in short-term group discounts.

What has enabled Groupon to grow so fast has been the apparent success of CEO Andrew Mason in managing old-school basics like hiring, motivation, marketing, and international expansion—albeit at a rapid pace. Network effects—organic internal product forces that cause growth to build on growth—determined much of the success of companies like Google and Facebook. While such forces have played a minor role for Groupon, issues of software elegance and interface sophistication matter far less than simply managing marketing and growth. Facebook became the world’s fastest-growing company in history in terms of customers by successfully inventing and refining software that generated sustainable network effects.

Groupon also epitomizes another major shift in the Internet era—from conventional marketing, directed at convincing people to buy, to product discounts, effectively paying them to buy. This is a consequence of the efficiency of the Internet channel. Once Groupon acquires an email address, as Mason famously described in a recent leaked memo, the company has no more conventional “marketing” costs. All it has to do is feed attractive deals into its pipeline. In this Net era, companies will increasingly enjoy such direct connections with customers, and be able similarly to exploit lower long-term marketing costs. Another example of this is when a company acquires a “fan” on its Facebook page.

The downside, though, is that customers in such a situation will be fickle. If you don’t deliver them real value via your newly-direct pipeline to their brains, they may abandon you as quickly as they hopped on board. This is one of the big concerns financial analysts have about Groupon. But this is also one reason Groupon is an especially fascinating company to watch in the evolution of a new Internet-based economy. It is the trial case for rapid success in a world where there are no businesses but Net-enabled ones. That world is increasingly upon us, whether most businesspeople realize it or not.

In this new world companies will rise and fall with unprecedented speed. The Net era will be one in which customer satisfaction will prevail above all else. Deliver it, and you will win, until you stop delivering it.

The biggest danger faced by Groupon may be in how it diverges so greatly from previous Net stars. It is not the quality of its consumer-facing software or interface that will determine its success and insulate it from competition, as it has for Google, Facebook, and even Amazon. Rather, success will depend on things much more down and dirty—how much money it saves customers and how fast it can find new merchants. Conversely, if it can continue delivering on that admirable goal of saving people money—a fairly unlikely outcome, in my view—it could become one of the biggest companies in history, given its growth rate so far.

This is why the Groupon IPO, now reportedly postponed, is so controversial. It’s almost a religious question. Those who believe the latter proposition—that Groupon can continue acquiring retailers and delivering savings and profits no matter how many other companies copy its model—will pay almost anything to get in. More hard-boiled analysts want solid evidence of a sustainable business model that can be defended from competition, and that the manifold costs of acquiring and keeping the customers is really affordable. It is painful to be on the bleeding edge.

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