In 2007, a young graduate student in public policy at the University of Chicago dropped out of the master’s program—Andrew Mason had been tempted by the offer Eric Lefkofsky, a venture capitalist, had made to invest a million dollars in Mason’s start-up idea. The start-up, a website called ThePoint.org, focused on online fundraising. It built on the realization that if people could see others contributing to the same cause as they were, they would contribute more or feel their contributions made more of a difference. Mason also introduced another condition, which gave the site its name. By this condition—called the “tipping point”—contributors’ credit cards would not be charged unless a pre-specified goal was met for each fundraising effort, and this made it less risky for donors by ensuring that they would not be contributing to a project that would fail for lack of funds. It was a great idea and still drives many online crowdfunding companies, like Kickstarter.
After a year, however, the site was going nowhere, and Eric Lefkofsky was getting impatient at the lack of progress. Mason reworked the business model based on what he had learned in the business so far. In an interview with the Wall Street Journal, he revealed his lessons. First, he had discovered that Internet-based companies that push altruistic interests do not succeed. So, ThePoint.org would have to be refashioned to cater to selfish interests. The second lesson Mason had learned was that you can’t work with an abstract idea. The tipping point needed a focus.
And so emerged a new company, Groupon. Its idea was simple: the site would focus on promoting local businesses—it would offer coupons to customers for at least one deal from a local business in their city every day. But again, as in ThePoint .org, the tipping point condition would kick in—the deal would become activated (or “tip”) only if a certain pre-specified number of customers bought the coupon from Groupon; if not, the credit cards of people who had signed up would not be charged. Thus, the name Groupon (“group” plus “coupon”). Groupon would charge customers once a deal had tipped and would pay the local business 50 percent of the revenues.
The model paid off for two reasons: First, unlike Facebook or Twitter, which offered free services, Groupon made money off every customer who bought a coupon. Second, it played the “network effects” model tremendously well in two ways—people who liked it and signed up for a deal would encourage their friends to sign up as well so they could get the numbers to tip the deal, and, further, the Groupon site (or e-mail service) itself became rapidly popular because of the network effect created by people telling each other about it.
Groupon also capitalized on the value that customers place on relatively scarce goods. Marketing psychologist Robert Cialdini calls it the “scarcity principle”: “Sometimes all that is necessary to make people want something more is to tell them that before long they can’t have it.” Jonah Berger has pointed out, in his recent book Contagious, that not only does scarcity increase demand but if a product or service is available in limited quantities, customers want to tell (brag to) others about how they got it, and thus create a network effect.
After the first test deal, for a local pizza shop, in October 2008—a “buy one get one free” offer—Groupon launched officially in November 2008. Within sixteen months, its valuation was touching $1 billion—the fastest company to do that after YouTube, which did it in twelve months—and it had more than 350 employees. As the number of deals offered every day increased, revenues exploded. In November 2009, one year after it began, Groupon on average offered seventeen deals every day (an 82 percent increase from November 2008), and by April 2010, Groupon offered thirty-one coupons on average every day (a whopping 250 percent increase from its first month in business). The revenues were similarly going through the sky—fourteen thousand dollars every day one year later, and more than forty thousand per day eighteen months later.
Groupon’s gross income grew by an eye-popping 2,500 percent in its second year. The Wall Street Journal compared this to second-year growth rates of other dot-com companies: Google (2004): 352 percent; Amazon (1997): 838 percent; Salesforce.com (2003): 128 percent; and eBay (1998): 724 percent.68 This is where communicative agility comes into the picture. While Internet companies in Silicon Valley employed computer geeks skilled in programming languages, Groupon sought employees who had a way with words—they were employed as marketing copywriters who wrote enticing text to attract coupon buyers or as savvy salespeople who built relationships with select local businesses. Chicago has often been ranked America’s funniest city, with its famous improv-comedy industry; Groupon found there a ready supply of young witty people for its marketing and sales positions. The Wall Street Journal provided the example of an ad for a skydiving deal: “Skydiving is the perfect way to celebrate a birthday, sweat out premarital terror for a bachelor or bachelorette party, or take a glorious leap into a new life as a migratory swallow.” The New York Times attributed Groupon’s success with words to the fact that it “mixed tools and terms from journalism, softened the traditional heavy hand of advertising, added some banter and attitude and married the result to a discounted deal.” The paper described how one of Groupon’s ad campaigns—for a one-hour horse ride at half price at a stable in Michigan—ended in more than 270 people buying the limited-time offer.
Sure enough, there was exponential growth in Groupon’s subscriber base. Soon Google came courting. It offered to buy Groupon for a whopping $6 billion, an offer that Groupon audaciously turned down with an eye on its own initial public offering (IPO). As it cruised to its IPO, venture capitalists rushed in with another $950 million in investment. It was now catering to 375 cities and thirty-five countries and adding almost a dozen cities a week. It made its IPO on November 4, 2011, on the NASDAQ exchange, raising $700 million (second only to Google’s $1.7 billion offering in 2004). Groupon was valued at $12.8 billion, more than two times what Google had offered.
But Communicative Agility Alone Is Not Enough
By November 12, 2012, just after the first anniversary of the IPO, the company narrative was very different. It was becoming apparent that the Groupon story was turning out to be as unrealistic as any fairy tale. Its $20 share was selling at $2.69, nearly 90 percent below its opening price. For all its wit, Groupon was clearly a laughingstock, a failed stand-up routine. Andrew Mason was fired as CEO in February 2013. But Groupon never really recovered. Its stock price has hovered around $4 since September 2015. What happened?
We get a hint from Mason’s final letter to Groupon employees, in which he says, in his wickedly funny way, “After four and a half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding—I was fired today. If you’re wondering why . . . you haven’t been paying attention.” What happened was that Groupon had prioritized communicative agility at the expense of the other agilities—and was paying the price for it. Let me explain how it lacked other agilities.
Analytical Agility on the Back Burner
Groupon did not seem to exercise analytical agility; in fact, it became questionable whether Groupon possessed enough of it at all. As Groupon was preparing its IPO, the company used an unconventional financial metric, which it called adjusted consolidated segment operating income (ACSOI). ACSOI was income calculated after excluding marketing costs, which made up the bulk of the company’s expenses. As a result, ACSOI made Groupon’s financial results appear better than they actually were. After the Securities and Exchange Commission (SEC) raised questions about the metric—which the Wall Street Journal called “financial voodoo”—Groupon downplayed ACSOI in its IPO documents.
Groupon’s sales teams—well equipped verbally but not analytically—drew up campaigns for local merchants that hurt them financially. Merchants collaborating with Groupon had to offer discounts of at least 50 percent and were led to set abnormally high limits in terms of the number of customers for whom the offer would hold or in terms of the time periods for which the offer would be valid. As a result, small merchants would be flooded with large numbers of low-paying customers, sometimes for long periods. The New York Times was soon writing a different kind of story about Groupon: it recounted the tales of merchants who were complaining about having to take loans to meet the operating expenses to serve these customers. In a leaked internal memo that the Wall Street Journal published, Eric Lefkofsky, who had taken over as CEO, wrote to Groupon employees, “Yet we all know our operational and financial performance has eroded the confidence of many of our supporters, both inside and outside of the company.”
Lack of Inventive Agility
Other commentators remarked on the fact that Groupon did not have any specialty in its offering that would prevent others from copying its business model. Indeed, by the time of its IPO more than five hundred companies across the world were imitating Groupon, from the Amazon-funded Groupon duplicate LivingSocial to niche players like BlackBizScope, which catered to African Americans. In such circumstances, where there are low barriers to entry, sustainability of the business becomes possible only through repeated innovation. You have to keep competitors playing catch-up. And, unfortunately, Groupon showed no such inventive agility.
Lack of Visionary Agility
Underlying Groupon’s fall was a tremendous lack of visionary agility—an incredible sense of carpe diem dominated the spirit of the company that focused singularly on the short term. There was no conceptualization of growth over the long haul. Any question that dealt with either of the visionary elements—what is the long-term impact or how widespread will this impact be?—became taboo in the soda-water environment created around the free-flowing words and the gaseous venture capitalist funds available to Groupon. Questions such as “What would make customers come back to the merchants who were offering coupons?” or “What would make merchants come back to Groupon again and again?” never came up for the management team.
Ultimately, with its exclusive focus on communicative agility, Groupon itself turned out to be just another fast-talking flash sale unable to sustain itself over time.
Excerpted from the new book, Nimble: Make Yourself and Your Company Resilient in the Age of Constant Change (Tarcher/Perigee 2018), written by Baba Prasad, a leading thinker and consultant on business strategy and innovation.