Almost by it’s very definition, once a company crosses the chasm as described by Geoffrey Moore in his famous book, everyone jumps on board. The late majority and the laggards. Everyone knows about it, and through this many more opinions on the business sprout up.

The latest example is Groupon. Everyone knows what Groupon is and many have even used it. I find that even people I know who are late-majority technology users recommend that I check out Groupon for a deal. I think this is a real compliment to the business, and especially the marketing team at Groupon. They’ve made it. They’ve done so well that they have inspired a rash of copycat businesses, so many in fact, that the next wave of copycats are actually aggregators for plethora of group-buying coupon sites.

That was a nice introduction, now let’s get to the meat of this ramble. There are many opinions floating around on how Groupon achieved its recent fame. Some exclaim, “they figured out how to do social buying”. Still others believe, “once they had the platform, small businesses just had to fork over their money”. And, of course, the ever popular “they had perfect timing”, like all they had was luck and anyone could have done it. The Groupon is certainly not a simple as it may seem, and definitely required a clever strategic thinker.

Groupon has done at least two things well. First of all, they went for deals, not actual product sales.

A deal is much easier to sell online because it gives the customer flexibility. They can choose when and how they want to redeem the coupon. Psychologically, people love to get a deal. It makes you feel unique, special, accepted and rewarded for your hard work in getting the deal, or just rewarded for being you. There was a huge market for coupons, deals and gift certificates long before Groupon showed up. Looks at the trends in Amazon’s growth, or ask my friends over at Retail Me Not and Tjoos.

These are all good points, but I have yet to mention the single greatest value in selling gift certificates. What happens when someone buys a gift certificate and doesn’t use it? It becomes free money for both Groupon and the business offering the discount! Free money! No one actually received a good or service, so there was no cost to anyone. Having worked as part of the payments team at Amazon, I can tell you that unused gift certificates are a multiple-million dollar annual business for Amazon. Having worked recently with a smaller online retailer that heavily makes use of Groupon, I have seen that the rate of unused coupons is higher than one might expect.

Of course, most deals on Groupon are so heavily discounted that the business is making very few dollars off each unused coupon, but it is still free money. One would hope that the increased brand exposure and influx of new customers is the real long term gain.

Financially, the coupon is purchased immediately. Groupon gets paid long before the business gets paid, and certainly before the actual service is delivered. The money is guaranteed, and Groupon’s work is done.

Time-based sales. A psychological tactic that has been used since the beginning of time. Woot was the online pioneer in this world, but Groupon took it to the next level. People are way more likely to open their wallets if they truly believe that right now is their only opportunity to take advantage of this deal.

It’s social, but not in the obvious way. You can buy coupons, then use social media to let your friends know about the new experience you just signed up for. Psychologically, Groupon tells you how many people have already bought the deal. If you’re the first one, you feel like a pioneer. If you’re later on, you can feel secure in your purchase knowing that you’re not alone. Even more important, is you’re giving the buyer an instant social life. Suddenly now that I’m on Groupon, I’m going places and doing things. Maybe, I’m even meeting new people, new friends. I have stories to tell friends and family about the great new spa in the city, or what it’s like to jump from a plane.

Offering deep discounts to get people to try a new service or product is a very old idea. But, the way Groupon has adapted it is worth marveling at. So many levels!

Followup: Here’s another take on Groupon and it’s effect on the businesses it promotes: http://www.ecommerceanalyticsblog.com/?p=285