Business - Written Thursday, January 7, 2010 by Denis Hancock - 0 Comments

Groupon.com: using minimum purchase thresholds to drive viral marketing

Groupon.com is one of the more interesting companies to have emerged in 2009. The basic premise of the site is simple – customers sign up to receive on daily deal from a local experience provider. Over a million people purchased such an offer in the company’s first few months (saving over $50 M in the process), the company is profitable, and Groupon.com is already in the top-2000 of Alexa website rankings.

There are a lot of reasons for this success – but the one I want to focus on today is around the strategic use of purchasing thresholds. Like Woot.com, Groupon.com applies a maximum threshold to create urgency for customers – buy now before it’s too late! But the more interesting thing Groupon does is use minimum thresholds - the offer is only valid if enough people sign up.

There are two things that make this interesting. The first, and more obvious, ties to viral marketing. It’s typically hard for a company to “make” a marketing message, or sales offer, go viral. But by putting a minimum threshold on the offer (i.e. only valid if 50 people sign up), Groupon creates a natural incentive for interested customers to promote the offer through Facebook, Twitter, the blogosphere, and other channels.

The second ties to the ability to test price discrimination strategies. In these early days, Groupon members represent new customers for most merchants using the platform. In a typical case, if a company wants to test offering a discount to draw in new customers, they do so rather blindly. If (say) only 2 people take you up on the offer, it probably wasn’t worth the effort – let alone the cost if you have to communicate the message through traditional media channels. The minimum threshold gets around this – merchants can select whatever price / quantity combination makes sense for them, and walk away (without paying a penny) if the threshold isn’t met.

There are many other interesting aspects of the Groupon story I’ve been following in our research (you can read about a couple of other companies I’ve been watching closely here), as well as interesting challenges and opportunities the company will soon have to deal with. Given that Groupon has been so successful in using the Web 2.0 to create business around collective buying (while hardly being the first to have tried), they are definitely worth paying attention to.