18 months ago, Groupon didn’t exist. Today, it has over 70 million users in 500-odd markets, is making more than a billion dollars a year, has dozens if not hundreds of copycat rivals, and is said to be worth as much as $25 billion. What’s going on here?

There’s obviously something clever and innovative behind Groupon — but what is it? Given that customers with Groupons are saving lots of money on goods and services, how can this possibly be good for merchants? Is there a catch somewhere?

There are significant network effects at play here: The more people Groupon signs up, the more targeted its deals can be. And there’s another social aspect to Groupon’s success I’ll come to in a minute.

But first it’s worth looking at the innovation in the name of the company: the idea that coupons only become activated once a certain minimum number of people have signed up for them. This is essentially a guarantee for the merchant that the needle will be moved, that their effort won’t be wasted. With traditional advertising or even with old-fashioned coupons, a merchant never has any guarantee that they will be noticed or make any difference.

But with a Groupon, you know that hundreds of people will be so enticed by your offer that they’re willing to pay real money to access it. That kind of guaranteed engagement is hugely valuable, and more or less unprecedented in the world of marketing and advertising.

Then there’s the twist in the “coupon” part of the name. No longer do merchants pay money for the privilege of giving coupons away for free in local newspapers. Instead, they receive money — half of the total paid up front. There’s something extremely gratifying about being paid to offer discounts to new customers.