What is Groupon and why in the world would they turn down a $5.3 billion offer from Google? Simply put, Groupon is a daily deal and location-based service website that has become extremely popular for the deep discounts it offers shoppers on everything from travel to restaurants to shopping.
How does it work?
Groupon works with merchants and service providers in over 100 cities to come up with “Deals of the Day.” Participating merchants and service providers are encouraged to come up with attractive discounts.
The Groupon staff then chooses a “Deal of the Day” for each city and sends the offer out to their membership list. These deals come from a wide variety of vendors and service providers and the discounts can be as steep as 90%.
Groupon works with vendors to make the offers as attractive and enticing as possible. Vendors can limit the number of Groupon deals they can handle and can also establish the minimum number of buyers it will take to make the deal worthwhile for t0 them.
For example, a merchant can say that the offer will not go forward until 100 people have signed up. Once that number has been reached, Groupon notifies purchasers that “The Deal is On!”
Under Groupon’s current business model, Groupon evenly divides the proceeds with the merchant/service provider. Groupon takes in the money directly from their subscribers and then gives the merchants their share of the proceeds by check.
Even though many businesses take a loss on these deals, most find that the deals pay off in the long run. These deals generate a great deal of buzz for the participating businesses and many customers who come to the business because of the Groupon promotion ultimately become repeat buyers.
As a result, fully 97% of the businesses that have offered deals on Groupon would welcome the opportunity to do it again.
The few companies that had bad experiences with Groupon were the ones that didn’t have the capacity to handle the influx of business generated by the deals.
To date, there are 115 million Groupon users and nearly as million coupons redeemed. Gross revenues for 2011 were estimated at $2.6 billion, with substantially higher numbers expected for 2012 and beyond.
Groupon makes their offers available on their web site, through mobile app development and through a daily email. Subscribers receiving these offers are then strongly encouraged to promote the deals through their social media accounts, especially through Twitter and Facebook, using unique URLs. When a user’s promotion converts, that user is rewarded with “Groupon Bucks” redeemable towards their next Groupon purchase.
Groupon also introduced its holiday store, allowing them to promote more than just a single offer to each metropolitan area.
Groupon’s Next Stage
Because Groupon has enjoyed such remarkable success, they rolled out a significant shift and expansion of their business model. Groupon found that limiting their offerings to a single “Deal of the Day” in each city, they were also limiting their revenue streams.
In a few select test markets (including Groupon’s home market of Chicago) they introduced “Groupon Stores.”
Groupon Store allows any merchant or service provider to register their business with Groupon. Once registered, merchants and service providers can offer special deals to Groupon members in their general neighborhood.
Under this model, merchants and service providers have two choices. They can elect Groupon to actively promote the deal, in which case Groupon keeps 30% of the revenues. If companies choose not to have Groupon promote the deal, then Groupon receives only 10% of the revenues.
Groupon simultaneously created “Deal Feeds” which allows members to follow specific merchants and get notification when those merchants are offering deals. Deal feeds include the featured daily deal, deals posted by merchants members choose to follow, and deals posted by merchants that Groupon recommend based on what we know about the subscriber.
The more personal information provided by the subscriber, the more closely Group can match deals based on such tastes and interests.
Groupon CEO Andrew Mason explained the new business model in a blog on the Groupon site.
“Our biggest problem is that demand is so high, merchants often wait months to be featured,” Mason wrote. “And while we once only had a few thousand customers per city, now we have hundreds of thousands — Chicago just added its millionth subscriber — making it increasingly difficult to find one deal that satisfies everyone.”
So, what types of businesses have been benefited by working with Groupon?
Groupon has been used by a wide and diverse number of businesses. Restaurants are the biggest users, but it is used frequently for event tickets, health care and spa services, recreation (gym classes, tennis lessons, etc.) and services (everything from tax services to bike tune-ups).
With the economy hurting ticket sales for professional and collegiate sporting events, Groupon has proved to be a great way to fill seats that would have otherwise been empty.
The University of Colorado offered $65 seats for $15 and sold over 1,000 seats in less than 24 hours. Not only did the University make money from the tickets, but they also profited from concessions and souvenir sales.