Ask HN: How does Groupon make money? | Hacker News Reader

Ask HN: How does Groupon make money?

3 pointsscrape_it9 comments

I'm having trouble understanding how Groupon generates net profit? From what I've read, its sort of like a Group Buying model (https://en.wikipedia.org/wiki/Group_buying) ?

So for example, if Suzy Wong's Chinese Restaurant gets 50 new customers from Groupon, which side is taking the risk here, is it not the restaurant? What if all 50 customers don't show up and end up cancelling, is the restaurant stuck with the extra bill of materials in anticipation of a surge in new customers?

What happens when those 50 customers don't end up coming back, again, who benefits here?

Seems to me this is a careful balance of satisfying consumers & business owners needs while also watching for Groupon's bottom line?

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Groupon typically sells coupons for 50% of face value, and pays the merchant 25%. So Groupon keeps 25%, the customer saves 50%, and the merchant effectively sells product for 75% off list price.

Depending on the merchant's cost structure, they may still make a small profit at 75% off list price. For example, coffee shops, yoga studios, and laser tag have mostly fixed costs and low variable costs, so during quiet times they can offer deep discounts and still come out ahead.

Most merchants lose money on each sale, but expect repeat business from those customers, so they compare the cost with advertising. After the initial group of idealists, most Groupon users were bargain hunters, and so the repeat business wasn't as valuable as some merchants hoped.

Many merchants make money on add-ons even without a repeat visit. For example, Groupons for dinner don't include alcohol, which can be a large fraction of the bill.

Another factor is the redemption rate -- some coupons are never used, and in those cases the merchant never has to provide the product and keeps the money as pure profit.

So, it was a good deal for some merchants and not others. Which is true of every form of advertising.

You really hit the nail with those simple percentage, its clear as day to me now.

So it seems to me that Groupon really makes sense for businesses with fixed & low variable costs, thick enough margins to come out ahead and either repeat business or extra spenders.

I think the advertising comparison makes sense here.

They make money by taking a cut of sales which the retailer is forced to discount, doubly cutting into his profits. Groupon is an obvious scam (at the expense of merchants) and was started by a guy with a history of scams.

So the retailer is forced to provide a deep discount, even if it forces them to sell at a loss? Who gets the final say here, might we assume Groupon? If so, why would retailers continue to utilize Groupon if it ends up being a net negative operation?

Can you elaborate on why you think its a scam? What did the founders do previously which supports those allegations?

There are always customer acquisition costs. But you hope you get some combination of repeat customers and the customers who do come end up spending more.

For instance one breakfast place we frequent is always running a $20 worth of food for $10. We always end up spending more. Besides soft drinks have ridiculous margins. Movie theaters make most of their money from concessions, food (movie and dinner type theaters) and the bar.

I see so the primarily utility of Groupon is that businesses can pay for a chance of repeat customers and/or extra spenders? I think the theater is a good example of the latter.

Then the question arises, why can't businesses do this themeselves? Why can't the breakfast place you frequent just advertise $20 worth of food for $10? Why Groupon? Is it because Groupon can send foot traffic on demand for a cut of the sales?

Yes, like Amazon, Groupon has its own traffic which would be hard for a small business to reach otherwise.

I'm sorry, it's been too long since I read about it. It was years ago. Maybe a Rolling Stone story?

To your first question, yes, Gropon decides the price. There are many examples of comapnies who made an offer through Groupon which put them out of business.

Scam? No! Companies can use it as marketing. If you plant it carefully you can get a few customers without having to fork a lot of cash for marketing by using Groupon.

Also, if you need to get rid of inventory you can sell the items at cost rather than have to sell it to a discounter at a loss.

Also, you decide whether to use them or not so you use them if it's an advantage to you.

Groupon can definitely be a plus to a company.

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