How Groupon Makes Money

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How Groupon Makes Money

Groupon (GRPN) has become a household brand among bargain seekers since its inception in 2008. Customers are connected to local commerce via the sale of vouchers and coupons for discounts to brick-and-mortar companies. In this respect, Groupon gets income by acting as a middleman, which is one of the oldest business concepts. The organization earns money from both products and services in three categories: local, goods, and travel. In certain circumstances, utilizing a Groupon coupon allows buyers to save up to 50% on products and services.

Key Takeaways

  • Groupon makes money by selling coupons and card-linked offers that connect customers with local businesses.
  • In many circumstances, the corporation sells directly to customers.
  • In an attempt to simplify the process for consumers, Groupon has moved its attention to card-linked discounts.

How Does Groupon Work?

  • Consumers may go to Groupon.com to get free discounts, such as coupons, for discounted local products and services. They may also receive Groupon bargains by using a Groupon Gift Card.
  • Businesses utilize Groupon for promotion and marketing. Payments for Groupon offers are made to Groupon, which deducts a charge and then distributes the remainder to the retailer.
  • Groupon generates revenue by collecting merchant fees for the offers that its consumers claim.

Groupon Basics

Groupon was founded in November 2008 and immediately gained popularity for offering big discounts to local companies. The firm went public in 2011, but sales have consistently dropped since then owing to rising competition and the battle to sustain customer acceptance. Recently, Groupon has altered its business model from a voucher-based approach to a card-linking one, offering Groupon+, in which a consumer earns cash back after purchasing a product offered on the Groupon site with a chosen connected credit card.

Groupon’s financial filings distinguish between two categories of income: gross billings and revenue. The gross billings figure represents the total revenue generated by the sale of products and services, excluding taxes and refunds. Revenue is calculated by deducting the part of the service or product provider from the total number of transactions in which Groupon served as a marketplace. Direct income is also generated by the sale of item inventories via the company’s online marketplaces. Groupon reported $2.3 billion in total billings and $967 million in revenue for the fiscal year ended December 31, 2021. According to its 2021 annual report, the corporation had 23.3 million active customers as of December 31, 2021, down from 29.5 million the previous year. In 2021, net income was $120 million, while operational cash flow was $120 million.

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Groupon’s Business Model

Groupon offers huge discounts on a wide range of goods, including fashion and cosmetic items, vacation packages, spa treatments, and gift vouchers to pubs and restaurants. Though customers may readily buy the same items directly from the companies who sell them, Groupon often offers pricing that are far lower than retail. In essence, Groupon acts as a powerful advertising engine, generating sales and increasing brand awareness in return for a fee.

Though companies get less than they would typically charge for products and services, Groupon functions as a marketer with vast reach, and merchants gain by not having to pay for the marketing upfront. Rather, they pay a percentage of money generated by the Groupon sale after the fact.

Groupon entices company owners by offering more foot traffic and a certain amount of cash. When the site originally began, Groupon discounts didn’t become active until a specific amount of individuals signed up, so participating companies knew they would have a certain number of clients.

Since the introduction of card-linking offers in 2018, Groupon has registered over seven million credit cards, according to its most recent annual report. The new approach attempts to make the procedure easier for the client; customers may be more inclined to use several card-linked goods than a series of separate coupon coupons. Furthermore, card-linked discounts enable clients to pay at the point of service and use the same bargain numerous times, which was not possible with the previous voucher approach.

Groupon also offers products directly to clients via its Goods sector, circumventing the voucher procedure entirely. Groupon’s Travel sector gives clients travel bargains such as flights and hotel stays; some of these are done via vouchers that customers must redeem later, while others are booked immediately through Groupon.

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Businesses benefit from Groupon. Access to new clients is a significant advantage. If the same 30 clients had paid full price for their services, the salon in the following scenario may earn more money—an extra $3,000 in income. However, those bargain-hunting consumers are unlikely to have visited the salon if not for the discount. Businesses are often ready to forego higher profit margins in exchange for a rapid flood of new clients.

Furthermore, many consumers wind up paying more than the value of the Groupon they purchased. For example, a consumer who buys the salon coupon in the above example could then treat herself to a pedicure since she saved so much money on the original treatment. Clients that come in because of a Groupon bargain may become regular customers if the firm delivers high-quality items or services.

Groupon’s Service Revenue Business

Groupon provides attractive discounts and coupons, acts as an advertising, stimulates sales, ensures minimum income, and aids participating companies with preparations. Groupon receives a percentage of all purchases made on the website in return for its advertising services and sales help. Depending on the seller, this proportion is usually about 50%.

Assume a local salon is facing a sales slump and chooses to utilize Groupon to attract new clients. The salon owner decides to give a $50 cut and color service, which is generally priced at $100. Groupon charges a service fee of 50% of the sales income. The offer will produce $1,500 in income from 30 new consumers, with the salon receiving $750 and Groupon receiving $750. When an offer is posted, everyone who bought a Groupon gets it, regardless of how many they bought.

For 2021, gross billings in the service revenue industry was $549 million.

Groupon has purchased a number of rivals, including the daily-deals site LivingSocial, the UK-based Cloud Savings, and the analytics firm Swarm Mobile.

Groupon’s Product Revenue Business

Groupon’s product revenue business is simpler than its service revenue business. In the event of direct sales of items to consumers through online marketplaces on its website and app, Groupon considers the income of each transaction as the customer’s purchase price.

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For 2021, gross billings in the product revenue industry was $171 million.

To enhance the number of merchants on its site, Groupon collaborates with other marketplaces such as GrubHub and Live Nation.

Future Plans

Groupon’s goal is to bridge the gap between online and local, brick-and-mortar businesses. Groupon is focusing on retooling its user experience to be as efficient and frictionless as possible, extending its platform power to merchants by enabling them to sell directly to consumers via Groupon, and developing its foreign company to match its bigger North American branch. The organization has experienced considerable changes in recent years, including the above-mentioned transition away from vouchers and toward card-linking arrangements. Though sales have continued to fall in recent years, Groupon is dedicated to adapting in order to better serve consumers and companies alike.

Key Challenges

The long-term sustainability of Groupon’s business model is a hotly debated subject. A large flood of clients paying a fraction of the retail price may be more labor than it’s worth for some firms. Furthermore, some opponents point to a perceived reduction in the quality of Groupon’s services in recent years as evidence of the company’s eventual collapse.

Maintaining the Marketplace

A healthy marketplace with significant recurring transactions is critical to Groupon’s success. If transaction rates fall, companies will be less willing to employ Groupon’s services, and the market may completely collapse. Following Groupon’s early achievements, the voucher model lost some of its luster, forcing the firm to discover new methods to engage merchants and consumers. In 2021, Groupon spent around $189 million on promoting its services and goods.

Groupon has a difficult struggle to raise consumer interest and turn around income. However, the corporation has been actively involved in new ways that seem to be quite promising.

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