Deal-a-day sites and retailers get social

March 18, 2010: 6:00 AM ET

"Deal a day" websites are changing the way we shop -- and raising tons of venture capital. Discounter Groupon is leading the way.

Groupon founder Andrew Mason, surrounded by subscribers at the company's Chicago office.

A few years ago Andrew Mason was a public-policy graduate student who had gotten into a social rut. "There's so much to do in Chicago," he recalls, "but I found myself going to the same movie theaters and restaurants."

To make trying new places less risky, Mason, 29, started experimenting in 2008 with a website that marries coupons with the wisdom of crowds. He figured an activity might be worth trying if it was cheap enough and appealed to a sizable group.

That experiment turned into Groupon, one of the hottest of the fast-growing deal-a-day websites. Groupon posts one deal each day in each of the 40 cities in which it now operates, and e-mails that deal, called a "groupon," to more than 2 million subscribers.

The steep discounts range from the ordinary ($20 off dinner at Delmonico's restaurant in New York City) to the absurd (half-price for an hour in a sensory-deprivation tank at SpaceTime Tanks in Chicago). If enough subscribers sign up for the deal, users receive a coupon by e-mail the following day -- and Groupon gets a finder's fee of about 30% to 50% of the total bill.

Because of the recession, restaurants, retailers, and suppliers have a lot of excess inventory, and companies like Groupon are popping up across the web to help move merchandise. Fashion has GiltGroupe.com, consumer electronics shoppers use Woot.com, and in the past year more than two dozen similar sites have launched. Post-recession, deal-a-day sites have the potential to change the way businesses market and sell their products if they continue to see the benefit in offering deep discounts.

It's a no-brainer for Michelle Johnson of the Vitality Unlimited Spa outside St. Louis, who says she snagged 600 potential new customers by offering a $68 massage for $30. Some 70% of the Groupon customers who have visited the spa have booked a second massage.

Businesses aren't the only ones flocking to Groupon. Earlier this year the company raised $30 million from Accel Partners and others. Groupon's appeal to investors? Mason says it has been profitable since last June, and he expects revenue of $100 million this year. He plans to use the venture funding to expand into 80 cities by the end of the year. For deal-hungry consumers, the expansion can't come fast enough.

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About This Author
Jessi Hempel
Jessi Hempel
Senior Writer, Fortune

Jessi Hempel is a New York-based technology writer for Fortune. She has written extensively about digital media, online advertising and social networking. Before joining Fortune in July 2007, Hempel worked at BusinessWeek and most recently served as their innovation department editor. Hempel is a graduate of Brown University and received a Masters in Journalism from The University of California at Berkeley.

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