I buy quite a few items from Groupon. I’ve bought sheets, towels, kitchen utensils, tours of Chicago, and sports tickets.
So, how do they plan to make money? Do they make money on the float since they charge your credit card as soon as you make a purchase, but don’t typically send the item you purchased for 7-10 days? Do they assume that some of the services that are sold won’t be redeemed? Are they selling excess quantity, like a travel comapny selling unused hotel rooms?
Groupon keeps about 50% of the Groupon cost, and the merchant gets to keep the other 50%. So a coupon that lets me get $60 worth of shoes for $30 earns Groupon $15, and another $15 for the merchant. Of course, the merchant is sending me home with $60 worth of shoes, so the merchants are really hoping that I will find $100 worth of shoes (therefore spending an additional $40,) and that I will come back next month, without a coupon, and buy more shoes.
Groupon doesn’t actually send me shoes or sheets, their customers (the merchants) do.
dalej42 essentially answered the question. For restaurants, Groupon is a mixed blessing-if you don’t buy some appetizers, drinks, etc., they lose money on you. In fact. a local restaurant went bankrupt-over half their customers were redeeming Groupon coupons. So, while its a good way to get people in, it does have a downside.
Groupon recently had coupons for 50% off Lasik. I can’t imagine what possible reason you’d have for using Lasik as a loss leader. I mean, it was Nationwide – a glasses store/optometrist, Lasiking someone invalidates both the need for glasses and contacts, and eye doctor appointments are usually yearly. If Lasik’s profit margin just so high that they’re still making a profit at half off?
I think there’s still quite a bit of anxiety about the thought of having someone burn off part of your eyeballs with a laser. Maybe if they get more people to come in, they can spread word in the community about how fast and painless it is (and hopefully not about how it causes unwanted side effects). As long as the price is enough to cover the marginal costs of the procedure, it could be effective advertising.
They also ding the store for the credit card fees so they [Groupon] aren’t out those either. In the shoe example, the store would end up getting another 30¢-$1.00 or so taken out depending on what exactly they charge for processing fees.
As a store you don’t look at this to make money, you look at it as advertising. A way to make money in the future (or above and beyond the Groupon sale).
It can balance out a little. For everyone that buys a Groupon and doesn’t redeem it, the store essentially gets free money, so that’ll offset those that bought it and did redeem it. But like I said, it’s typically a losing thing so you have try to figure how much your going to lose and assuming you can afford it, write it off as advertising.
My WAG is that most of the price of Lasik is paying for some very expensive up-front equipment costs. Each procedure requires a few hours of (not cheap) labor, but that probably only contributes a few hundred to the price. Add another few hundred to cover overhead, and then the rest of the price helps pay off a million-dollar investment.
To help offset the cost to the merchant, some people don’t redeem their coupons before they expire.
Maybe the Lasik example is counting on a higher nonredemption rate than usual?
On the other hand, some merchants who sell through Groupon don’t understand the terms of costs very well. When it was brand new, one of the first articles I read about it was criticizing Groupon for killing the businesses who participated… but these were businesses that didn’t put limits on the number of coupons, over-discounted, etc. It could very well be that the Lasik people are kicking themselves all the way to bankruptcy court for not paying more attention to the numbers.
For services, this is probably true. I bought a steam train dinner ride for 4, for $100. Full cost was about $55/person. At the time, I remember wondering how this was going to benefit the train ride company, since there wasn’t much chance that I was going to become a repeat customer.
But adding 4 people to the train ride doesn’t much increase the cost of running the train, or insuring it, or maintaining the tracks, or buying the train in the first place. So if the $100 covers the cost of food and any extra staff needed, then there is no monitary loss due to my coming to dinner. If I also buy a bottle of wine or a commemorative sweatshirt, than I’ve added to their profit, and if my talking about the ride leads to my friends going on the ride, at full cost, then score!
I bet the deal was for 50% off their normal base price for Lasik. Say, $250 per eye instead of $500 for eye.
This seems likely because on daily deal sites normally have an up front fee you pay the day you purchase the deal and then receive a coupon for redemption with no further purchase from Groupon.
However, nobody actually prices LASIK on that simple of a fixed fee. $500 (or $250) is the price for simple myopia and any complications add price. So you may go in for your consultation and they tell you to fix your severe myopia and astigmatism and thin cornea, the cost is $2000 per eye.
It seems extremely unlikely to me that you’d get to pay groupon an extra $750 per eye and ‘scale’ up your 50% off.
Much more likely you get $500 credit per eye for your $250 investment and have to pay them the extra $1500 per eye.
Anyone whose eyes qualify for the simple $500 rate win out.
It may make sense for a new restaurant. Get some word of mouth going which is important (and discount eaters may forgive some growing pains) Restaurants don’t make money for while anyway, might was well get the buzz going.
Any business that signs on with a deal company like Groupon has to do a sort of actuarial calculation in order to optimize the benefit of the deal to the business. You have to calculate not only how many deals you’re willing to offer, but you need to assume, in making the offer, that every deal you sell will be redeemed. Sure, it would be great if half the purchasers forgot to use their Groupon, but if you rely on that then you will end up screwed, like the UK bakery that had 8,500 people, each wanting a dozen cupcakes at a 75 percent discount. The UK bakery was screwed even further by the fact that, outside the United States, Groupon keeps all the money from unredeemed vouchers, rather than passing it on to the business.
Another thing that you need to consider is how much long-term business the deal is likely to bring you. If a deal loses you some money in the short term, but nets you a few dozen long-term, loyal customers, then it might be worth it. If everyone who buys the deal is just a one-shot customer, though, you might be better off giving the whole thing a miss.
One important consideration, of course, is exactly what you’re selling. As Tastes of Chocolate correctly points out, there are some advantages to selling a service on Groupon, especially if you’re in a period where your service is suffering a dip in customers. In the scenario described by Tastes of Chocolate, the business still had to feed the group, but might have made some money on extra stuff like wine. In some other industries, the costs to the business of servicing an extra customer are even lower. Lasik is one such case, where the cost of the equipment itself, and the cost of rent and general overhead are much greater than the cost of actually performing the surgery. Even more obvious is something like a hair or beauty salon, where an hour without a customer is gone forever, so if you can get someone in for half price you can still make some money, and also maybe attract a loyal client.
This area, interestingly enough, is one reason that Groupon’s own business plan might be in trouble, especially in the long run. As this Wharton Business School professor explains, the model works best in a down economy, because this is precisely when services have the greatest need to fill empty seats:
There are also businesses that want the advantages of the Groupon system without the risk. This restaurant, for example, had a separate menu printed for its Groupon customers, where every item was more than twice the price of the regular menu. Read the whole thing; it’s pretty mindblowing.
Of course, customers can try to game the system as well, like the 47 college students who went to a restaurant and ate as a single party, but then asked for 47 separate checks and argued that the restaurant should honor a Groupon held by each person, even though the conditions of the Groupon explicitly stated that the offer was only for one person per table per visit.
There was also an article i read about a year ago, which i can’t find now, that discussed some cases in which a few businesses on the verge of failure were offering really big Groupon offers in an attempt to get a cash injection. In some cases, it seemed that the business owners never intended to honor the coupons, but were just looking to pull the cash out of the business before folding.
In my experience with Groupon, 6 or so uses, the merchant is giving you half off of, e.g. the first $50 dollars spent, when it is impossible to spend less than $100. Some merchants, particularly restaurants, are hoping for repeat customers, word of mouth advertising etc. to help them cover their losses. If you buy a groupon coupon and do not use it in a timely manner the coupon has no value at that merchant but Groupon will still let you use the money you spent on another coupon.
Many critics of Groupon have stated that it cannot survive because merchants cannot make money this way however Groupon recently released numbers (for whatever they are worth) that stated that 48% of local Groupon sales are to repeat business clients.
Groupon originaly, ISTM, required a minimum number of persons in the group before the sale price become official. To think that businesses lost money because they had too many customers sounds hard to believe
Wow that’s all very interesting! I had always had the impression that Groupon was essentially a group discount, which could only be used if a minimum number of people bought a particular coupon. The company would make money due to a guaranteed bulk purchase. I would assume it to scale proportionally to conventional group discounts.
Lots of people think that, but that is not the case. Per Groupon’s FAQ:
So if you pay $20 for a $40 meal and the Groupon expires you can still go and use the Groupon like a gift card for the $20. You can’t transfer it around to a new deal unless you get a refund in Groupon Bucks.