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Deeply discounted products or services often cause retailers to lose money. But if these promotions accomplish other strategic goals, such as bringing in new customers, they can be tremendously valuable. Success depends on reaching the widest possible audience of interested consumers with a deal that they cannot ignore. A model that delivers just such a one-two punch is Groupon.com.

Every day, Groupon alerts users to a particular deal in the major U.S. cities Groupon serves. A woman living in New York City, for example, might receive a discount to a nearby nail salon. Economically, the deals tend to be quite attractive: $10 worth of pizza for $5, a 64 percent discount on membership to the Chicago Art Institute, and nearly half off interactive cooking classes, including the final exam: a four-course gourmet meal. The deals often revolve around social events, such as classes or dining out, and refer to goods or services that customers may find appealing but have been unwilling to try because of the cost.

Although Groupon searches for deals without fine-print restrictions, the company attaches its own strings: A minimum number of people must sign up before the promotion takes effect. This caveat motivates users to spread the word through social networking sites. If they never reach the minimum, the discount does not apply, in which case those who have signed up are not required to pay full price.

So far, maximums have been more of an issue than minimums. The Chicago Art Institute promotion added 5,000 new members, an impressive addition to the 85,000 members the museum had accumulated over its 100-year history. The owner of the pizza chain that offered 50 percent off coupons had 9,000 responses. Business owners, Groupon warns, need to be ready for this level of interest. Some small businesses cap their offers to avoid overwhelming staff or frustrating customers who may have to wait months for an appointment.

But these businesses also see Groupon as a cost-effective way to attract new customers; 120 companies lined up to offer their promotions in Chicago, where Groupon launched in 2008. It has since expanded to other cities. Investors are also excited about Groupon’s business model, because it doesn’t involve inventory or shipping (i.e., users print Groupon’s coupon and bring it to the vendor). Most offers involve intangible offerings, such as services, instead of tangible goods, so Groupon also never has to face issues with stock-outs, as do many other group buying sites.

Discussion Questions

1. What is Groupon?

Mary Pilon, “Finding Group Discounts Online,” The Wall Street Journal, August 11, 2009.