I'm always suspicious of businesses that aim to acquire lots of customers by offering their services for next to nothing, in the hope of making money from them later on. Bargain-hunters rarely turn into profitable long-term customers. So when I first heard about the rapid growth and super-high valuation of current social discounting darling Groupon, I was deeply skeptical. Here is a social media site that encourages respectable local businesses to offer their services at or below cost in order to attract a surge of new customers. Adding insult to injury, it charges a substantial premium for doing so. The only participant guaranteed to make money on the deal is Groupon. Everyone else is shelling out.

You can see how, in the wrong hands, a proposition like this could rapidly turn sour. This is a business idea that stands or falls on how well it is executed. Fortunately, it turns out that Groupon appears to execute exceptionally well -- even winning a CEO of the Year award earlier this month. There are lessons here for other entrepreneurs in how to successfully take advantage of both social media and the Web's disruptive force on established industries.

Groupon is successful because of the careful way it taps into two huge seams of existing value that are looking for a new home.

1. Millennial spending power. They're young, professional, metropolitan and web-savvy, with ready cash they're eager to spend on themselves. For these affluent consumers, Groupon tackles the problem of, how do I decide which local restaurant, service or attraction to visit next? This is not the dowdy old newspaper coupon-clipping of their parents' generation. Groupon takes care to make sure its promotions are fun and aspirational. As it describes itself on its own website: "Groupon is a trusted city guide for savvy young urbanites looking for new ways to explore their city." The icing on the cake is a cunning viral model: to ensure that a deal reaches the minimum quantity to succeed, early converts are incented to actively reach out and persuade their friends, colleagues and neighbors to sign up.

2. Local business profitability. Before the Internet came along, local businesses sustained a thriving newspaper industry because these hundreds and thousands of small enterprises had both the resources and the need to advertise to their local communities. Since the advent of the Internet and the slow decline of traditional print media, these businesses have begun to look for online channels that will perform the same job for them. Groupon provides a new means of attracting affluent potential clients that is no more costly (and far more immediate) than any other customer acquisition strategy available to them. In addition, Groupon ices the cake with a SaaS-like model that uses its economies of scale to deliver high-quality copywriting and advice on deal positioning that these businesses normally couldn't afford. One last point: it's highly measurable. Once the offer has closed, you know exactly how many customers to expect and how much they're costing.

The key point about Groupon is that it invests in customer success, on the seller's side as well as the buyers' side, to ensure all participants feel well served. For its buyers, it is carefully focusing on a well-defined segment that is both affluent in its spending on the services it offers and fluent in the social networking that it relies on to spread the word. It brings those buyers to a 'long tail' of local businesses that have money to spend on customer acquisition and who yearn to reach the huge spending power of the digitally switched-on millennial generation.

Looking at the unserved needs on both sides of the equation, this is a smart place to be, and unsurprisingly Groupon has significant rivals, including Amazon-backed Living Social and Facebook's Places Deals, which incidentally launched today in Europe. There is a pot of unmined value to be realized and it's probably possible to make money here, at least in the short term, without executing well. But the long-term revenue potential is so much more valuable that it would be crazy to throw all that away with poor early execution. In Groupon's case, it is aiming to out-execute its rivals and secure a leadership position.

As one astute commentator observed, (quoted in another thought-provoking analysis),"Groupon is selling business relationships and they are in a position to extract most of the long-term value of those relationships." There's more value that's still to come, too, as some astute Groupon investors have remarked.

Sure, Groupon is in the right place: helping local service businesses find new customers via the social Web. It's there at the right time: when business people are starting to realize traditional local media is no longer working from them, just at the moment when the new wave of Web-savvy consumers has come of age. Both of these factors are enough to build a highly profitable business, but Groupon appears to have one more factor that makes the difference between a good business and a really great one: the right people making the right choices.