Lately I’ve been studying Groupon, the online group coupon site to see exactly what they do and how they do it. I’ve found a lot of really cool information about them, which I’ll share below.

There are really 3 reasons why Groupon has seen such an explosion in their business. Recent reports say their business is worth 1.25 Billion dollars. That’s right. Billion. And at the heart of their operation, they are nothing more than good old fashioned email marketers.

Before I go into their 3 big reasons for success, let me give you a quick recap of who they are and what they do in case you haven’t heard of them. Groupon sends a daily coupon to their email subscribers offering a special price for a unique or interesting product or service in your home town.

Currently they are in 99 cities in the United States. Everyday, an email is sent with a special one time offer to everyone in your city. Examples include “hip” places like cupcake bakeries, sushi bars, and high end spas. The special coupon is usually for 50% or more off a product or service.

An example might be $75 of spa services for $25. But here’s what makes Groupon unique. Groupon sets an amount for how many people have to buy the special in order for the coupon to be honored by the business.  So, if the amount is set to 40 people and only 39 buy what happens? The 39 people are given refunds and the deal is off.

And that’s really important…but I’ll talk about that in a second. For now, let’s look at WHY this Groupon movement is growing so rapidly.

1) They use email to market their product

Even though it’s 2010 (or later for you future readers) email marketing is STILL not as mainstream as it should be. Many businesses, especially small businesses, aren’t incorporating email into their marketing campaigns. Larger brands are, and they are seeing results from it. It’s never been easier to reach someone for such a low cost.

Email is so cheap and the tools are so easy to use now, that I think within 10 years, it will be a lot tougher to reach people but for now, it still works and it works wonders. Groupon taps into this so instead of sending offers in the mail, they send an email. This makes their operation less burdened with “paper” work and a lot more agile.

They can easily change campaigns that are being sent based on real-world results in real-time. Compare that to mail where weeks can be wasted starting and stopping a campaign mid flow.

So, if you’re a local business or an entrepreneur of any sort – start collecting name and email from all your customers. Email them regularly with specials and deals. It’s the easiest way to increase profits.

2) They target the right crowd of people (a “hungry” underserved demographic)

Groupon’s core demographic is young women age 18-35 who are college educated and make good money. Their largest segment of income earners rakes in $100,000 or more per year.

What makes Groupon work so well is that they KNOW who their target is. They go after them, they cater to them. They know what they want and they give it to them. I call this market underserved not because they aren’t marketed to but because they aren’t marketed to correctly. Sure, they are sold to through “artsy” brand billboards and colorful magazine spreads. But rarely has this group been presented with a direct response offer.

Think about it.

And beyond that, this group is underserved because they are urbanites…and many have yet to find the rhythm of their life. Their young and looking for things to do. And they want to try new things. So what better than a daily offer of exciting and new things they can do with their friends right in their own backyard?

Sometimes people try to hard to find a niche that isn’t being advertised to. That’s practically impossible. Instead, find a market that is being advertised…and do it the right way.

Your lesson from this in your business is to KNOW YOUR MARKET. Or to put it in Shakesperean terms:

“To thine own market be true”

Don’t worry about the other “noise” in the market place. Speak true to your customer, offer value, excitement, and a sense of belonging and your results will shock you.

3) They use Social Media And “Group Think” to their advantage

This is the big one that helped them grow so rapidly. They tied social media and group think into a living breathing organism. And they did it with the old direct response trick known as fear of loss. It’s the equivalent of “better hurry because if not this offer is GONE”. But instead of restricting the quantity, they restricted the time allowed to buy (call in the next 30 minutes!) and most importantly they set a quantity minimum or the offer goes null and void.

How smart. (I’m jealous!)

Let’s look at the average social media user. When do they spread messages about a product or service? 90% of the time it’s when they’re angry about their experience. Nothing motivates someone to “spread the word” like anger. Angry voters sway almost every election. Anger makes people take action.

10% of the time, when the customer has an AMAZING experience they will tell their facebook or twitter friends, and they may share that a few times. But the overall effect is not a great as one would hope.

So, what Groupon did is tie into another deep human emotion…greed. And I don’t mean greed in a bad way. I just mean greed as in this is something I want and if enough people don’t buy it I won’t get it. So, now instead of writing about what they don’t like, Groupies have a financial incentive to spread the work about this “incredible” offer.

But this in itself wouldn’t be enough as any spammer will tell you. Pushing offers is easy, but the product has to be valuable, otherwise customers will burn out and those who spread the message would be embarrassed publicly. This is a big deal in your social network.

So, Groupies feel good about spreading the message. It’s the modern equivalent of that friend who tells you about the great deal down the street. They aren’t salesmen, they are friends looking to save you a few bucks.

And that’s why Groupon has exploded like it has.

Your takeaway from this is simple. If you want new customers, create compelling offers. Make it easy for your customers to spread your marketing message. Make it so your customers feel proud to tell others about you. Let them give such a great deal that their friends thank them for sharing your product or service with them.

I know it’s easier said than done…but it can (and should) be done.

And how is all this working for Groupon? Consider this. Recently, they ran their first national campaign for the clothing store GAP. In a matter of days, the offer grossed 11 million dollars. Sales poured in at 543 per minute.

Studying Groupon and applying what they do to your business can only help you. If you want to see more growth in your business, watch Groupon. Right now they’re doing everything right.