Anatomy of a Groupon deal

June 26, 2011

A typical receipt on a Groupon dealI decided to write about the latest and hottest startup ever – Groupon (or Grouponzi, as they call it), but this whole thing with Groupon is too complicated and getting out of control. So I will make a few short posts instead, covering only the most interesting facts. Let’s start with what a Groupon deal is:

1. A Groupon sales rep talks a merchant into a Groupon deal. This could be a toy store or a cafe, or a service like house cleaning or educational courses.

2. A typical deal is to give customers a coupon for 50% discount (sometimes more!). A customer pays say $20 to Groupon to receive a coupon and later can use the coupon at merchant to purchase up to $40 of goods or services.

3. Groupon typically takes 50% from the coupon sales and pays 50% to the merchant. This means that the merchant is paid $10 for something that they would typically receive $40 for.

4. Coupons are valid for a limited but prolonged time, like 6-12 months. The 50% off the coupon sales are paid to the merchant using the following schedule: 1/3 of the amount in 5 days, another 1/3 within 30 days, and the remaining 1/3 within 60 days. So this scheme may look like a loan to a business: Groupon gives a business money now to serve a bunch of customers for a year.

5. There is no way to exchange a coupon for money, and if a coupon is not used, the customer doesn’t receive her money back.

The benefits of this deal to the customers are obvious – they enjoys huge discounts. What about the merchants? The promise is that it’s a great marketing: you have an effective way to issue coupons and bring new customers, growing your business. Well, a lot of things may go wrong.

1. Many of the customers who walk in the door are your existing customers. It is a terrible idea to give a 50% discount to your customers (unless you are into fake pricing) alone, but you don’t even get to receive the remaining 50% – you receive only 25% after Groupon takes its share. There are evidences where total up to 90% of Groupon visitors were existing customers of the merchant.

2. Many of the customers don’t spend more than their coupon’s value is. Consider this: a guy buys a $20 coupon for $10, goes to a shop with the coupon to grab something for $10 and receive $10 in change. So, the merchant just gave away a product priced at $10, also gave away very real $10 – all this for a $5 received from Groupon. If it sounds like the merchant was screwed, it’s so because it just was.

3. A lot of customers demonstrate abusive behavior, like they tip off discounted check or don’t tip at all, they try to repeatedly use the same coupon several times, and they threat to write derogatory reviews on Yelp if anything is not to their liking.

No wonder some merchants find that a Groupon deal brings them a loss of $10,000 or more.

 


Follow

Get every new post delivered to your Inbox.