Fresh Grouper

Well, if all your Facebook friends bought a boutique cupcake online, would you?

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The economy is still so weak that one in eight Americans now relies on food stamps to help pay their grocery bills, and yet in May, Mission Minis — a San Francisco purveyor of expensive pygmy cupcakes — experienced such high demand that its exhausted employees were threatening to quit after several marathon days of grueling baked goods preparation. To satisfy the city’s appetite for these Justin Biebers of the dessert world, one Mission Minis employee reportedly spent 52 hours baking, boxing, and taking orders.

All across the country, Average Joe small businesses are enjoying similar boom times in the midst of a recession that has laid the titans of Wall Street to waste. An “unassuming, slightly cramped” spa in New York with a reputation for rudeness suddenly attracts 2,570 blotchy Manhattanites in search of deep-pore cleansing. A bikram yoga studio in Chicago is so overwhelmed by chatty newbies that it runs out of fresh towels and the place turns into a sweaty, swampy mess. A restaurant in Los Angeles with a seating capacity of 104 sells 4,577 tickets for a dinner-and-a-show combo in a matter of days.

Behold the power of Groupon.com, popularizer of a phenomenon venture capital types are calling “social commerce.” Like QVC for hipsters — or at least QVC for people who fancy themselves a bit more upscale and fashionable than the people who buy Hip Hider Gypsy Drawstring Skirtinis — Groupon offers one deal on a product or service at a time, at a discount of 50 percent or more. The Web 2.0 twist is that the deal does not go into effect until a pre-specified number of Groupon users have committed to making the transaction. So if you really want in on a specific offer, but the offer needs 25 customers to happen and only 19 people have signed up, you starting pimping it to all your friends on Facebook and Twitter. A decade ago, psychological Luddites worried that the “vacuum of cyberspace’ was turning us all into sad and lonely shut-ins whose only friends were provocatively named snatches of computer code trying to sell us $5.99-a-minute phone sex. Today, it takes a village just to buy laser hair removal treatment.

Groupon debuted in November 2008. Like Woot.com, which was founded in 2004, Groupon caters to those of us who find shopping at Target or Amazon.com a bit too much like reading The New York Times or Encyclopedia Britannica. There are too many departments in such places, too many choices, and we don’t have the time or the inclination to make it all the way through a dense, overly item-filled housewares aisle these days. Groupon satisfies our need for brevity by giving us one thing to choose from, and just 24 hours to mull it over. At 11:59 p.m., the day’s deal expires.

For business owners, Groupon is a low-risk proposition. Unlike traditional media outlets, the site charges no upfront fee for access to its audience. Instead, it takes a 30 to 50 percent cut of the revenues a given offer generates. Business owners can set both the minimum number of customers a deal must attract, and a maximum number of those who can take advantage of it. In essence, it allows small businesses to act, in a temporary and controllable way, like a Walmart or Best Buy, generating profits from huge volumes rather than from huge margins.

Even given Groupon’s social networking component, its understanding of Web attention spans, the entertaining copy it uses to soft-sell the masses, and its obvious appeal to business owners, its growth has been remarkable. It now offers daily deals in approximately 90 cities, and it claims to have 6.8 million total daily e-mail subscribers. Collectively, those subscribers have purchased 6.7 million “groupons” in less than two years. Because of such numbers, investment bankers have been cuing up like Yuletide penny-pinchers at a Black Friday sale to get a piece of the action. To date, Groupon has raised more than $170 million in funding.

Naturally, a mechanism this effective at selling mid-priced leisure activities to demographically desirable consumers was created with much nobler intentions. In December 2006, Andrew Mason, a graduate student in public policy at the University of Chicago, obtained funding to create a site called The Point. Its purpose: To serve as a platform to facilitate group action. For example, if you want to stop Giorgio Armani from slaughtering rabbits or generate support for a billboard-free Oregon, you can create a campaign that proposes some specific action that will help facilitate this goal, such as donating money or writing a letter to Congress. When you create a campaign, you also specify the number of people who must support it in order for it to reach its “tipping point.” If a campaign tips, then everyone who signed on is supposed to perform the specific action you’ve proposed.

While The Point still exists, it’s lightly trafficked. The campaigns often seem quixotic best, and even if specific tipping points are reached, there’s no way to compel the people who’ve promised to take action to actually follow through. It all feels a little, well, pointless. In 2008, however, Mason decided to apply the site’s model to more tangible humanitarian endeavors, like making high-tech grooming more affordable to Portland’s hairiest citizens.

In the early days of American mass production, clocks, guns, and other once-scarce products were manufactured in such quantities that they became affordable to the average man for the first time. In our own era, we see the same phenomenon play out in multiple industries. The wealthy get cell phones, sushi, and teeth-whitening services, then we all do. As avaricious do-gooders such as Henry Ford and Sam Walton have amply demonstrated, selling stuff to the crowd is a proven mechanism for social change. When you increase production, you lower costs. When you lower costs, you can lower prices and thus increase demand. In turn, this increased demand leads to even lower prices and more innovation as entrepreneurs compete with one another to claim their share of increasingly lucrative markets.

In leveraging the collective buying power of the crowd, Groupon hasn’t added some new altruistic component to the cutthroat business of buying and selling stuff as cheaply as possible. Instead, it’s merely discovered the progressive, democratizing power that has always animated capitalism. And yet while any entity that can create such great demand for teeth-whitening services in this sluggish economy deserves a Nobel Prize of some sort, Mason sometimes talks as if his company has wandered off its virtuous path and is missing some crucial component. “Everyone who works here believes in social change. We’re looking for ways the collective of consumers can benefit the community,” he told The Washington Times last summer. In an interview with Time, he expressed similar sentiments: “None of us would work here if it were only about selling stuff at a discount.”

To augment such nuts-and-bolts capitalism, Groupon dreams of less commercial endeavours. It would like to feature more fundraisers for worthwhile community groups. It wants to “tap into the whimsical, playful potential of collective behavior” by, say, encouraging anyone who purchases tickets to a specific event to wear a cape while attending it.

If Groupon is really committed to social change and benefitting the communities where it operates, however, it might think twice about devoting resources to such non-commercial ends and instead concentrate on more revolutionary ways to empower its customers. Indeed, while Groupon implies that it empowers consumers, its current incarnation is more geared to empowering business owners. It still only offers those consumers whatever a given city’s entrepreneurs have already thought to offer them. They’re the ones who initiate the deals, who set the prices, who determine the rules that govern the transactions. If Groupon truly functioned like The Point, it would be the other way around. A more consumer-centric Groupon would allow consumers to ask for, and get, whatever it is they truly want. An individual might request a 50 percent discount for a meal at an Italian restaurant. If the proposed deal strikes a chord with other consumers, a pool of committed customers would materialize, as would a pool of restaurants hoping to fulfill this transaction.

In this incarnation of Groupon, individuals would function not just as consumers but also as entrepreneurs and focus group participants, dreaming up new services and combinations of services, and showing exactly how much demand there is for such things. Consumers empowered to buy exactly what they want would spend even more than they already do. Entrepreneurs armed with the knowledge of what consumers truly desire would devote fewer resources to businesses destined to fail. And perhaps at last we’d finally get bikram yoga studios that serve adorable pygmy cupcakes while simultaneously doing our dry-cleaning, all for 50 percent off. Karl Marx himself couldn’t have envisioned such a utopia. • 7 July 2010

Greg Beato is a contributing editor at Reason magazine. Follow @GregBeato on Twitter.

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