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Groupon 2.0

Andrew Mason reveals what's next for the deal-a-day website.

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Photograph: Taylor Castle
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Photograph: Tim Klein
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Photograph: Tim Klein
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Photograph: Tim Klein
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Photograph: Tim Klein
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Photograph: Tim Klein

On an otherwise-normal Monday morning in August, Andrew Mason storms down a hallway at Groupon’s Chicago HQ, angrier than any of his employees have ever seen him. “Running with the Devil” blares from behind the door of a studio apartment with which the fastest-growing company in history shares a floor, and Van Halen’s power chords are disrupting operations.

The young founder and CEO of the deal-a-day site pounds on the door, but David Lee Roth keeps yowling. “Michael, you have to turn it down!” Mason shouts. “And you owe me that money!” In a set-up oddly par for the course at this social shopping e-commerce start-up, there’s apparently a lease arrangement between Mason and the mysterious man who lives there.

“Go away!” comes the sharp reply from inside. But Mason keeps knocking. Moments later, the seldom-seen resident erupts into the hallway in a yellow jumpsuit that matches the bandages wrapped around his head. “Andrew’s an idiot!” the man rants. “I don’t have your money. Daddy has your money!”

Before any of the 100 or so workers witnessing the spectacle can aid their boss, the man they know only as Michael shoves Mason and runs off as he lets loose a final taunt: “You will never get your money, and you’ll never find me!” A stunned Mason gives chase, but Michael’s got too much of a head start, even with his seemingly bum leg. Soon, all Groupon employees receive an e-mail from Michael that reads, in part, “Please stay out my room and do NOT trust andrew! I don’t have any moneys. Do not tryto find me.” Mason later sends his own all-staff e-mail asking, “Can you help me find Michael?”

Clues to Michael’s whereabouts keep turning up, while the apartment remains just as its unhinged tenant abandoned it, including the exercise bike set up to play Sade’s “Smooth Operator” on a connected turntable when someone pedals it.

If this is all starting to sound like an elaborate prank, that’s only because it is. “That’s what’s special about Groupon,” Mason says. “We create these…little events. So much of what we do is about surprise—‘What’s the daily deal?’ And who would imagine a room like that inside an office? As an employee, it shocks your system out of the monotony and says, ‘This isn’t like any job you’ve had before.’”

If Groupon, reportedly set to be sold to Google at a non-discounted price north of $5 billion, can harness its unprecedented growth to create a sustainable business selling discounts on services in hundreds of cities around the world, Mason and other company leaders believe keeping this irreverent culture intact will prove critical to its success.

As Aaron With—the company’s editor-in-chief, who gets credit for naming Groupon, not to mention helping mastermind the Michael’s Room bit—puts it, “The weird, stupid, ridiculous stuff is so important for us to do well.”


SECRETS INSIDE THE TENT FORT

Another key factor will be the Groupon 2.0 initiative Mason and several colleagues have cooked up inside a tent fort on the sixth floor of the riverside building at 600 West Chicago Avenue the company shares with Japonais and Motel Bar. And “tent fort” is no metaphor: Sheets are draped over a section of workstations the way kids turn their rooms into pirate dens.

No reporter had clambered into the secret clubhouse until the recent evening I meet Mason for a beer at Motel Bar and he offers a tour of the project that aims to keep his company ahead of “everybody and their grandmother” starting competing discount sites.

Mason aptly describes Groupon as the emerging Amazon of services, doing what the Seattle-based online retail giant has done for products: creating an incredibly efficient (sometimes too efficient; more on that later) way for merchants to reach new customers. But the 2.0 version’s social-media focus may end up making Groupon the Facebook of shopping as well. That potent combination means the big green G likely will become an increasingly important part of the shopping conversations you have with friends and family, all while capturing a greater share of your—and their—discretionary spending.

The new Groupon grew out of a question Mason asked his team: If the company were able to launch with the advantages it has now—“a huge merchant community, operational machine and customer base—would we build the same thing today?” The answer: “Maybe not.”

Groupon 2.0 plans to leverage those strengths in a way that “gets more merchants through the queue and extends the service,” Mason says. “We’re not dramatically increasing the number of deals a customer sees, but we are giving them something more relevant.”

For businesses, 2.0 means Groupon Stores. Any merchant that “claims” its Groupon Stores page can use it to communicate directly with every Groupon member who has bought one of its past deals (if it has done one before) or who chooses to “follow” the merchant because they’re interested in future offers. Merchants vetted by Groupon also can set up self-serve deals that get their offers in the pipeline quicker. (A merchant bottleneck—as long as six months after deals are signed and perhaps ten months from first contact—was giving Groupon competitors an opening to steal away clients with offers of fast access.) All of those changes may help merchants develop a much richer relationship with Groupon customers: A one-time marketing hit becomes a long-term conversation.

“I keep seeing deals we would never run as a feature,” Mason says of the beta self-serve option. Although they’re worthwhile, they’re too small to warrant a full-blown Deal of the Day—he cites examples such as knife-sharpening discounts and cheap hours of play at a video-gaming salon.

As a Groupon member, you will have a personal opt-in “deal feed” that includes the daily feature offer selected for you by an algorithm using your location, age, past buying habits and other data to understand what bargains will make you itchy to spend. In addition to that Deal of the Day, which was the core of Groupon 1.0, the upgraded feed will include recommended self-serve deals and messages from merchants you’ve bought from, as well as from others you’ve chosen to follow. You’ll even be able to alert Facebook friends when you buy a deal, and see Groupons purchased by your pals. “By having people get different offers, they will have a bigger incentive to share,” Mason says.

Merchants can send any kind of message they wish to their customer list, even offering discounts that avoid revenue-sharing with Groupon (the standard split for traditional deals is 50 percent, while those rolled out under the self-serve plan earn Groupon 10 percent to 30 percent of each sale). But if Mason’s worried about losing revenue through back-channel communications, he doesn’t show it. In fact, he says, merchants should see a decent marketing payoff from deals pitched by Groupon to even small segments of its user base (now more than a million strong in Chicago). And those official deals will reach well beyond the people who’ve bought a store’s previous offers or took the time to follow their page, Mason says, thus justifying a revenue split.

Not bad for a company spun off from a social-action site that sputtered out of the gate.


MISSING JUSTIN TIMBERLAKE

We like to boast that Time Out Chicago was the first media outlet to profile Groupon (we’ve also done a successful subscription Groupon), but what’s also true is we wrote about Groupon in March 2009 in the context of Andrew Mason’s earlier online start-up, The Point.

The point of thepoint.com, which launched in 2007 (and continues to operate under Groupon’s increasingly large shadow), was to help people harness the power of group action by creating a “tipping point” for everything from charitable fund-raising to boycotts. You’d have to spend your time or money only if enough people signed on to make that investment worthwhile. The idea attracted nearly $5 million from investors, but it never really caught on. There was one element of The Point that seemed promising, though: Users were organizing group-buying discounts, getting merchants to trigger sweet bargains if enough people bought into—or “tipped”—the deals. Maybe the site could help set up some of the discounts, Mason thought.

It was a glimmer of hope during a time so dark Mason had gone to With’s apartment in October 2008 and cut him loose the night before the editor was to embark on a six-week European tour with his band, Volcano.

“Laying him off was the worst thing in the world,” Mason says one evening at Motel Bar.

Earlier, at the same bar, With had shared his perspective on that fateful night: “It felt like a defeat. That The Point wasn’t going to take off was a big disappointment for both of us.”

Mason and With had become friends several years earlier, when they were undergrads at Northwestern University. They’d played in an indie-rock band, Planet of the Plants, with Mason on keyboard (both played guitar and sang). They had a bond. And just like that, it could have been over.

Only that wasn’t quite the way it played out. Unlike the story of business betrayal told in the Facebook movie The Social Network, Mason and With had a relationship built as much on honesty and integrity as it was on shared creative vision. So With kept writing freelance for Groupon, which launched while he was in Europe.

Shortly after Volcano returned to Chicago, “Andrew called me and told me he wanted to go more full-force with Groupon and I could be writing and doing sales,” With says. “I thought twice about it,” he admits, “but I’d helped start it, so if it was going to take off, I wanted to be there for the ride.”

Mason refers to With—who cops to being an obsessive workaholic—as “that really smart friend you have in college, but you don’t know who will pay him to do a job.” So, “Being able to bring him back was great, but better was him finding a role and earning that role. We’ve built on the unique strengths of the people who started Groupon. That’s what I love about this company.”

Mason and With recently caught The Social Network together at a Logan Square theater. “I thought it was good as a movie, but I didn’t relate to it as an entrepreneur,” Mason says. “We didn’t have a Justin Timberlake. There was no hooking up in the bathroom—as far as I know.” (Employee hook-ups at Groupon are now common, though no one’s been caught on the bed in Michael’s Room yet.)

So what would the Groupon movie look like? Mason laughs: “It’d be long, with a lot of tired people.”

With says he and Mason actually joked about that the night they saw the film. “I told Andrew we’d need to create a lot more drama,” With recalls. “He’d probably have to fire me again.”


HALF A BILLION IN BARGAINS

But where The Social Network is a cautionary tale, Groupon presents an inspirational one. As Mason and With describe the company’s ascent, it’s clear that key aspects of its business model developed organically, many times out of necessity. Local focus? Well, they had no access to national merchants. In the early days, With says, “We were begging businesses to try it. Deals might need to sell ten to tip and wouldn’t tip.” The tipping concept: taken from The Point. Launching during a recession when people were especially hungry for bargains and workers were amazingly easy to find? Fate. And where Amazon has fought sales-tax collection battles in many states, Groupon’s selling gift certificates—bingo, no taxes to collect.

By the beginning of 2009, “We started selling 200–300 Groupons a day,” With recalls. “People were talking about it and we were getting better deals.” As the rocket ride continued, “We realized only recently, this is not only an entirely new business, but an entirely new model for commerce.”

The model has done so well that Groupon started netting a profit after just seven months and will generate an estimated $500 million in revenue this year. Fewer than 200 employees were aboard when Groupon held its 2009 holiday party; it’ll employ about 1,000 here by the end of 2010, with sizable European and Latin American contingents, as well as operations in Japan and Russia and an office in Palo Alto, California, dedicated to developing Groupon’s mobile business. Some 30 million consumers see around 400 Groupon deals a day in more than 300 cities globally. More than 130 of those are in North America. One of its recent national deal experiments, with the Gap, sold 445,000 units in one day (even though it crashed the site), generating more than $11 million—not a bad day’s work.

The company keeps gobbling space in its HQ building, but desks are still set up in conference rooms to handle the relentless growth. Even so, it seems like a fun, if briskly efficient, place to work. You know you’re in the customer-service space when you see the wall of head shots next to one group of workstations—many of the reps have improv comedy backgrounds because, Mason says, “They know the line between taking people seriously and having fun.”

Doodle-filled whiteboards line other walls, and during one of my walk-throughs, a woman works with a paper crown on her head; it’s her birthday. The fact that employees sell into cities across North America from this office leads to amusing conversations. On the elevator, a woman says a colleague laughs every time someone mentions a particular north-of-the-border market. (In addition to being the capital of Saskatchewan, you see, Regina rhymes with vagina.) That kind of humor plays in an office with an average age of 25.

From the top down, Grouponistas are expected to adopt the ethic of being transparent, collaborative and—thanks in large part to the jokey-yet-well-researched Deal of the Day write-ups Mason calls “the heartbeat of the company”—absurd humor. Among those employees, always, sits Mason. He moves to a different workstation every few months. If it’s a bit awkward to suddenly have the boss sitting at your elbow, staffers “realize pretty quickly that they don’t have to treat me with any respect,” he jokes.


STEVE ALBINI, GROUPON GODFATHER

The first time I meet Andrew Mason, we have lunch at Buddy Guy’s Legends, where Fruteland Jackson’s playing an acoustic set to a room that’s alarmingly empty for a Thursday. Mason’s dressed in dark jeans and a button-down shirt, tails out, sleeves rolled up to his elbows. Standing 6’4” with a mop of brown hair, he has a thoughtful, open-hearted demeanor some might call boyish, but one gets the sense he’ll upgrade his wardrobe long before he turns cynical.

What might you like to know about Mason beyond the prodigy persona? He and his fiancee are getting married next fall in a refurbished Colorado ghost town. (Mason insists that renting out an entire town isn’t as hoity-toity as it sounds.) When he turned 30 in October, colleagues flew his parents to Chicago from their home in Pennsylvania and proceeded to roast him during what he terms “the most embarrassing 90 minutes of my life.” Mason’s been commuting to work by Vespa from his Ukrainian Village home since April and says “it’s changed my life” by allowing him to zip through traffic and park right in front of the office. His latest scooter, a 275cc model, just happens to be Groupon green. “I haven’t had anything close to a near-death experience” on Chicago roads, he notes, adding, “I’m trying to go all-winter scooter.”

During his rare off hours, Mason works his way through Bach’s Goldberg Variations on the Steinway Model B grand piano he bought as “my one splurge when I finally got some money from Groupon.” (He’s on variation three of 32.) When he got that first big Groupon check, he deposited it at one of his bank’s supermarket counters only to be told by the surprised clerk that he should split it into multiple accounts to lock in FDIC coverage (which insures $250,000 per account). After lunch (my treat—I’ve got a Groupon, which the server is delighted to accept, thus ruining a potentially dramatic story moment), he’ll geek out on the new Amex card that gives him a free companion seat every time he flies to Europe. He’s clearly still coming to terms with the budding mogul lifestyle.

Makes sense, given that he was inspired to start a business by working as an engineer at Steve Albini’s Electrical Audio recording studios on Belmont Avenue, where the aesthetic is decidedly nonmaterialistic. “Watching people pour themselves into their work, and the results—that’s the way to achieve something special,” Mason says. “Seeing people at the top of their craft is incredibly inspiring. I learned my work ethic there. I don’t think I’d be doing what I do now if not for my time there.”

And what does Albini, the session wizard and Shellac member who could claim the mantle of Groupon’s spiritual godfather, say to his protégé these days? “He always asks, ‘Are you a Republican yet? Are you a Republican yet?’” Mason says. “I like to see him every few months so I can make sure I’m still the same person.”

Even the notoriously acerbic Albini praises Mason effusively. “He’s not a dreamer. He’s a guy that actually pulls stuff off,” Albini tells my colleague Jake Malooley. “When Groupon started to take off, it was obvious—and in the face of all the knockoff competition, still is obvious—that it’s the cock of the walk. Andrew is the reason why it can’t be emulated successfully elsewhere: Nobody else has Andrew.”

That sentiment is echoed by Julie Mossler. She heads up Groupon’s PR operation, but I know her well enough from her pre-Groupon days to believe she’s sincere in saying, “He’s better at everyone’s job than they are. It’s irritating as shit, but you can’t not respect someone like that.”

Right now, Mason’s a happy vegetarian, marveling at the meatless menu options. “It’s rare that you’ll see a meatless steak at a blues club,” he says. “It’s pretty startling.”

He loves that Groupons “nudge people out to experience the city,” and indeed, I’d had no idea Buddy Guy’s served lunch even though it’s a few blocks from my Loop office. The big room’s half full by the time we leave, and the Deal of the Day led at least two of those customers through the door.


AFTER THE GOLD RUSH

So, what could kill Groupon, or at least turn it into a bust for Google? It’s a fair question. After all, the business that used to occupy its headquarters building pioneered a revolutionary new sales concept only to get beaten at its own game. Montgomery Ward gave us mass mail-order retail in 1872 and led the world in the category until Sears started posting bigger catalog sales around the turn of the 20th century. Sure, Ward’s survived another hundred years (while giving us Rudolph the Red-Nosed Reindeer in a Groupon-like burst of whimsy), but the company had to adapt by opening department stores, and Sears outlasted it on that playing field as well.

Awareness that an upstart rival could similarly leave Groupon in the dust drives the company’s aggressive expansion strategy, thanks in part to advice from early investors Eric Lefkofsky and Bradley Keywell, who brought entrepreneurial experience to the table.

“We didn’t have any background in scaling a sales organization,” With says. “If those guys hadn’t been driving us to do every city or you’ll regret it for the rest of your life,” the young leaders might have hesitated.

Such hesitation could have been quickly fatal. “We invented the model, but a lot of these parts are easy to replicate,” With notes. (Though that’s less true of its back-end technology and unique office culture.) “It’s important for us to be the first in every market,” he says.

As Groupon adds North American cities at a dizzying rate (not to mention its May acquisition of European clone CityDeal, which is also expanding at a rapid clip), the question arises: How sustainable will the Deal-a-Day model be in smaller markets after this digital gold rush?

The last time I visit Groupon, Sioux Falls is its smallest city, and Mason notes there are about 150 North American markets of similar size. “It’s profitable and customers buy and merchants sign up,” he says. “It’s sustainable as long as that happens.” But what about when one Mexican restaurant offers its second Groupon in three months because there aren’t enough merchants to give the service variety? “We don’t know,” Mason admits.

Beyond competitive and sustainability issues, there are ongoing questions of backlash. Some of that is undoubtedly driven by the media’s habit of quickly trying to tear down that which it builds up. (In September, the TechCrunch news site even ran an article headlined, “Why Groupon needs a backlash.”) But disgruntled small-business owners who couldn’t cope with the flood of customers brought to them by Groupon (often after they refused to set a deal cap) have given the company a publicity black eye.

A Rice University study released in September also raised questions about the effectiveness of Groupon as a marketing tool, but the author, noting the small size of his survey sample, wrote that he would “make no claim that our study’s results reflect performance of the overall Groupon client base.” (Even so, two-thirds of merchants surveyed said they made a profit and most would use Groupon again.) Though many media outlets wrote about the report without pointing out its significant limitations, a definitive case study on the company has yet to be conducted. And it’ll take more time to determine how effective Groupon is in creating repeat customers.

Groupon has responded to these issues by ramping up merchant-support options via Groupon Works, an online suite of tips, tricks and video tutorials from people who’ve run successful deals. Sales reps also do a lot of live hand-holding—as I was able to hear while listening in on random sales support calls. There’s also rigorous scrutiny of how big a promotion each merchant can handle; any Groupon employee who works on a deal can raise questions and hold up the offer until they’re answered.

“I was told from early on that you need to know how many chairs, how many appointments, how often the tables turn,” says saleswoman Sydney Slutzky, who works the San Francisco market from her Chicago desk. “If owners throw out a big number [for how many Groupons they can sell, rather than setting a reasonable cap], I say, ‘You need to talk to your business partner.’” In addition, Groupon deploys on-the-ground sales support in many markets to help businesses that need extra TLC.

“If the reality is some merchants aren’t going to educate themselves and need hands held, we’re not the kind of business to say that’s your fault,” Mason says. “As the pioneer of a new business model, it’s our responsibility.” And if enough Groupon merchants have bad experiences, of course, competitors look more appealing. It’s not altruistic to protect your flank.


TRYING TO STAY COOL

As Groupon becomes better understood as a marketing tool, both inside and outside the company, the horror stories should naturally lessen. And by offering more targeted deals, Groupon should become a useful tool even for merchants who’d be washed away by the tsunami of customers generated by an offer sent to a city’s entire list.

“We’re trying to surprise customers” with an eclectic mix of deals, Mossler notes, so Groupon wants to find ways to keep working for small merchants even as it grows ever larger. “If we wrote off the low-revenue deals, we’d alienate a big part of our customer base.” But one Phoenix small-business owner last month shared correspondence with tech news site Mashable indicating Groupon dropped his signed Deal of the Day because it wouldn’t generate enough revenue, which underscores why ramping up targeted deals is such an important evolutionary step. In fact, Mossler says, that merchant later booked one of the deals that goes out to a portion of the city’s Groupon list. In Chicago and other cities with huge customer bases, at least some targeting now takes place with almost every deal.

The final big threat to Groupon—and the most difficult to combat—could be the loss of its cool factor. In the early days, it was hip to whip out a Groupon at a restaurant. But even though I always spend more than the deal amount and tip well on the full bill, I sometimes get attitude from servers when I unfold that print-out, and I’m far from alone. I think twice before buying a restaurant, spa or salon Groupon these days (the three most in-demand categories). There’s too much potential for overcrowding, too many fears it might actually harm the merchant, and too much suspicion employees of the business will peg me as a cheap bastard. I last bought pure restaurant discounts nearly a year ago; two of the three I purchased then resulted in bad service after I told the server I had a Groupon (one of the places, 44th Ward Dinner Party, has since closed).

It’s hard to blame merchants for being irked at some of the cheapskates who redeem Groupons. For instance, the high-end restaurant Naha sold nearly 5,800 Groupons last December. Chef-owner Carrie Nahabedian did lots of research and preparation, including hiring extra kitchen staff and busboys. “It generated more business than I ever thought possible,” the chef tells TOC. “It was a beautiful experience. It stimulated people to come in who didn’t even have a Groupon.”

But she also shares tales of discount-toting pals pretending to be solo diners with the same reservation times and then pushing their tables together to get around the one-Groupon-to-a-party rule. Those customers were the exception, but they wore out their welcome quickly. “Would I do it again?” Nahabedian says. “No. It was physically and mentally the most demanding thing on our system.”

Even a successful Groupon like Naha’s can strain a business and, as Mossler puts it, “The model doesn’t work if we deliver the wrong kind of customer.” (She insists that most Groupon users are classy consumers, but any marketing program will draw a few bad apples.) Mason says Groupon’s doing all it can to deal with issues of scalability, sustainability and backlash, pointing to the 2.0 initiative as a way of addressing its growing pains.

On the other hand, Groupon 1.0 worked seamlessly for Time Out Chicago. We sold more than 7,000 subscriptions in 24 hours—and an astonishing 85 percent of them were first-time subscribers. For cultural institutions and merchants that can handle a large number of new customers, even the old firehose version of Groupon could be a godsend: An e-mail pitches your business to a million eager potential customers, and you don’t pay a penny up front? That’s huge. And the consumer base is impressive: half make at least $70,000 a year, and most members of that group earn north of $100,000. As trainer Keith Griffith told a class of rookie writers recently, “They’re like us—except richer and better educated.” Break those folks into targeted segments and the experience for merchants can be even better.

The backlash narrative continues apace, though. Witness the outcry when Groupon recently secured $3.5 million in job-creation funds from Illinois, a state flirting with insolvency. Mason says of the criticism, “It’s understandable: $3.5 million to the fastest-growing company ever.”

In the end, though, “As long as you’re transparent about your business, there’s nothing you can be gotten for,” he asserts. “We want to make it easy for people to punish us,” so the company can learn quickly from mistakes. Mason cites the open comment pages connected to every deal as a backup for when internal vetting of a merchant fails to detect problems. When an Atlanta portrait photographer allegedly used other people’s photos as work samples, for instance, commenters exposed the situation in real time, and Groupon pulled the deal.

“You take the hit and move on,” he says.


AMAZON, EBAY AND…GROUPON?

As it morphs into an international powerhouse, Groupon’s trying to stay humble. Visit the main reception desk and you’ll see nine magazine covers framed on one wall. One frame holds the recent Forbes cover proclaiming Groupon “The next web phenom.” Other covers, from the likes of Time, Fast Company and BusinessWeek, also hype once-hot tech companies. “Don’t mess with MySpace,” warns one headline. “What’s next for Napster?” asks another.

“Our marketing guy thought we should put some press on the wall, but I didn’t want an atmosphere of popping the Champagne,” Mason says. “We still have a mountain to climb, and other iconic companies will be a footnote in history.”

Indeed, all is hubris. But that doesn’t mean you don’t put your head down and keep working to perfect your business model, even while Google starts measuring the drapes.

“Most of the big mistakes we made were on The Point,” Mason says. “We learned to be skeptical of the best ideas. You have to have the vision that what you’re going to do will change the world, but that it’s also destined to fail. Being on the lookout for failure is essential for me to run the business. You have to remind yourself to be afraid.”

But it may be the competition that needs to be nervous. “Give young, smart people a clean slate and give them room to follow through on a few core values and they can do something really fresh and interesting,” With says. “I’d like to think we remain the market leader and we are in the stratosphere of eBay and Amazon.”

Sounds like a pretty good deal, if it can get to the tipping point.

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