Take an owner of a rock-climbing business that has existing equipment and a storefront. The operating costs don't change based on the number of people who show up. A coupon deal can actually generate some extra cash by getting more bodies into the facility. Dholakia says each merchant must know their costs, factor in a price that draws customers, project the number of costumers that will buy the coupon, and estimate incremental revenues.
Cons 1. Deals attract low-end bargain seekers. Because the Groupon customer base is made up of deal-seekers and bargain shoppers they might not be willing to purchase beyond the value of the coupon. So, there are low rates of spending and low rates of return.
One problem with price deals is diminishing returns; thus, merchants need to put a cap on the number of deal coupons that are to be sold, says Dholakia. Deals hurt the brand.
The obsession with price doesn't necessarily make for a lot of brand loyalty or even brand awareness. One negative aspect of daily deal sites is that price promotions usually hurt the brand of the company offering it, says Dholakia.
It makes customers price sensitive. When they get something at a much lower price, they then become less inclined to pay full price for that same product or service in the future. Deals don't generate repeat customers. Groupon has a low conversion rate for repeat customers, according to marketing experts. You may never see the person again once they use your coupon.
Or that person may not be willing to buy from you again without a coupon in hand. The percent of new customers that redeem the voucher that becomes repeat visitors of the business is estimated at around 19 percent. It varies by product categories. Deals are not profitable. Another problem is the split.
If you do the math, merchants need to gross margins well in excess of 50 percent for Groupon to work for them.
The promotion is very steep, usually 50 percent or more. Most businesses are built on margins of 75 percent, which means if the customer just comes in and buys the deal, the owner is going to loose money, says Dholakia. Restaurants usually have higher margins. There are better deals out there. Daily deals sites are not the only game in town. You can run a similar promotion for less money. There are plenty of marketing programs you can use; does it make sense to use this one, asks Dholakia.
For example, you can offer a discount or promotion on a Facebook fan page. The company generates both product and service revenue in three categories: Local, Goods, and Travel. Groupon was launched in Nov. The company went through an IPO in , but since that time revenues have frequently been in decline as a result of increased competition and the struggle to maintain popularity with consumers.
More recently, Groupon has shifted its business model away from a voucher-based approach toward a card-linking one, wherein a customer receives cash back after using a specified linked credit card to complete a purchase of a product advertised on the Groupon platform.
In its financial statements, Groupon identifies two types of income: gross billings and revenue. The gross billings number is the total income from the sale of goods and services, excluding taxes and refunds.
Revenue represents the sum of transactions where Groupon acted as a marketplace minus the portion of the service or product provider. The company also receives direct revenue from sales of merchandise inventory via its online marketplaces. For the year ending Dec. The company reported an active customer base of Groupon sells a variety of products at deep discounts, including fashion and beauty items, vacation packages, spa services, and gift certificates to bars and restaurants.
Though consumers can quite easily purchase the same products directly from the businesses offering them, Groupon often offers prices far below retail. Essentially, Groupon serves as a powerful advertising engine, generating sales and stronger brand recognition for the business in exchange for a fee.
Though businesses receive less for goods and services than they would normally charge, Groupon serves as an advertiser with enormous reach, and merchants also benefit by not having to pay for the advertisement upfront. Rather, they pay a split of revenue earned based on the deal with Groupon afterward. Groupon appeals to business owners by promising to increase foot traffic and guaranteeing a certain amount of income.
When the service first launched, Groupon deals didn't become effective until a certain number of people sign up, so participating businesses knew that they have a minimum number of customers coming in. With the advent of card-linking deals in , Groupon has enrolled close to seven million credit cards as of its last annual report.
The new system aims to make the process smoother for the customer; consumers may be more likely to take advantage of multiple card-linked offerings than they would a series of individual coupon vouchers. Further, card-linked deals allow customers to not pay until the point of service and to utilize the same deal multiple times, features that were not available with the older voucher model.
Through its Goods segment, Groupon also sells merchandise directly to customers, bypassing the voucher process altogether. Groupon's Travel segment sells travel deals, including flights and hotel stays, to customers; some of these are done via vouchers, which customers must redeem later, and others are booked directly through Groupon. Groupon provides value to businesses. One key benefit is access to new customers. However, it is likely that those deal-hunting customers would not have come to the salon if it weren't for the discount.
Businesses are often willing to trade larger profit margins for the benefit of a swift influx of new customers. In addition, many customers actually end up spending more than the value of the Groupon they purchase. For example, a customer who purchases the salon voucher in the above example might treat herself to a pedicure as well, since she saved so much on the initial service.
If the business provides high-quality products or services, customers who initially come in because of a Groupon deal may end up becoming regular patrons. Groupon offers impressive discounts and coupons, serves as an advertiser, generates sales, guarantees minimum revenue, and assists participating businesses with preparations.
In exchange for its advertising services and sales assistance, Groupon takes a cut of all the sales made on the website. For example, assume a local salon is experiencing a slump in sales and decides to use Groupon to drum up new customers. Mary does the books and realizes:. Mary still has a ways to go until she makes a profit. According to a NY Times article a gourmet pastry shop can have margins as high as Realistically we would expect to see a gradual retention rate — some customers will return more frequently than others.
John has a jewelry store with a profit margin of After a while a few of the customers return. John does the books and realizes:. John made a profit. We replaced the profit margins, the groupon value, and units sold. The spreadsheet did the rest. This may be a stretch, but this whole scenario was built to be a stretch. During this time we also talked to more businesses and found a few real Chicago stories although everyone is a bit hesitant to share their numbers.
A couple of them stood out:. I was walking down the street in Nov. Inside they had a Groupon sign, so of course I took the opportunity to ask a few question. The owner was manning the store, as it is common in many small businesses. She said the Groupon was a big success.
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