Tuesday, January 12, 2010

What's The Point?

Innovation sometimes happens by accident. Sometimes through a moment of inspiration. More often, it's a product of conversation. In the case of Groupon, the Chicago-based website that offers discounts at restaurants, museums, health clubs, clothing stores, dentists, sky-diving clubs, pedicure salons, it was a conversation about The Point. The Point was a website launched by Andrew Mason, whose brief affiliation with the University of Chicago was a quarter-long period of study with the Harris School of Public Policy. The Point was an attempt to employ the principle of the tipping point to inspire volunteer campaigns, charitable giving, and other worthy activities. The idea was simple: users could post a challenge - for example raising money so the Comunicada Foundation can give hens and chicken coops to families in Masaya, Nicaragua - and set a tipping point. In the case of the Comunicada Foundation, the tipping point was $1000. If visitors to The Point reached the $1000 tipping point, the money would go to buy hens and chicken coops for Masaya. If the tipping point wasn't reached, then any contributors who pledged to give would be off the hook, and their credit card wouldn't be charged. The point behind The Point was that people often feel charitable, or they want to work for change, but they feel like their contribution or their voice won't make a difference. The Point provided a bucket, where people could drop in their small contribution and see progress toward the larger goal, making people feel they were part of a micro-movement.

Andrew and his financial backer, Eric Lefkofsky, puzzled over how to make money from the concept. The result was Groupon, which was based on a simple concept: businesses need business, and consumers want discounts. The goal is to bring them together. And Mason saw that this was fundamentally a tipping point problem. Businesses are reluctant to discount, because it represents a loss of revenue. And too often, the people grabbing up the discounts are people who would have visited the business anyway. But, what if you could guarantee the business this: lots of new customers and an opportunity to only deliver the discount if it made financial sense to the business. For example, if 300 people walk through the door and get your product for half-price, and 200 of those people are new customers, you've lost revenue you might have collected from the 100 returning customers who are taking advantage of the discount offer, but you've collected revenue from 200 people who might never have walked through your door. So Groupon reaches out to businesses and says: a) set a discount price and b) tell us how many customers it will take at that price for this deal to make sense for you. Once those numbers are set, Groupon puts the deal on the website. If the tipping point isn't reached, the business isn't obligated to provide the discount. And the prospective customers who took the business up on the offer walk away, without their credit card being charged. But - and this is clearly part of the business model - hundreds, perhaps thousands of prospective new customers learn about a business when it is featured on Groupon.

What's the point? Mason's original idea - that he could create social change by creating a forum where people could propose projects and then assemble the numbers to fund those projects - had real appeal. But to a great extent, The Point wasn't much more than a social media site with a heart. It wasn't a business. The site doesn't carry ads. For any successful campaign where money is collected, the site keeps 5% of the total for "transaction and administrative costs." But many of the campaigns are action based, for example, a campaign to force KFC to adopt cruelty-free standards for the chicken they serve in their restaurants. For these, The Point gets nothing. Mason and Lefkofsky saw they had an intriguing model, but no way to profit from it. Groupon was the result of this effort. The company won't reveal their revenue, but they recently secured $30 million in investment capital to expand their operation to fifty new cities in 2010.

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