Evaluating Groupon Business Model & How does Groupon make Money

Evaluating Groupon Business Model & How does Groupon make Money – UE Analysis

Groupon Business Model
Groupon Business Model

Groupon Inc. is, well another dinosaur after eBay. It was once as famous as FaceBook and Amazon but everything went down the toilet. ¬†ūüôā This is an e-commerce marketplace running deals & discounts thereby connecting millions of subscribers with local (nearby) merchants by offering activities, travel, goods and services in more than 28 countries.

About Groupon, Funders, Founders and Facts

The company should be credited with one thing, reaching billion dollar sales value in fastest possible time (still holds today) of 16 months since inception.   The company was formed as The Point, based on the book Tipping Point (Another Entrepreneur must read along with Outliers) to which the founder thought of the buying power of groups and rest became Groupon!

Groupon Founders: Andrew Mason (was fired post-IPO), Eric Lefkofsky, Brad Keywell.

Groupon Funding: ¬†$1 million by Andrew’s ex-boss. ¬†Today Groupon is a listed entity with $8 billion market capitalization.

Groupon Business Model

Groupon Business Model is as straightforward as a daily needs store keepers :).  Make money on the trading by being the middle man.  They make most of their money by advertising deals and products on behalf of business owners and make a commission on each successful sale.

Groupon Business Model via Deals

Initially, Groupon was a daily deals site (Yes, SnapDeal was copied from here, now stop gloating and start reading ūüôā ) from there they pivoted into a full-blown marketplace of savings on group buying (group + coupon).

The Business model here is multi-fold.  Affiliate Network of small businesses, pre-agreed volume based discounts and commission, advertising fee for featured and sponsored products/deals.

Groupon Business Model via Affiliate Networks

The actual sale of the product or service happens on the website of the other partner who then pays Groupon agreed commission.  Please note here the sale has to happen first and then Groupon gets money.

How does Groupon make Money

How does Groupon make Money
How does Groupon make Money

Is affiliate business so big that Groupon eventually made about 5 billion USD in annual GMV?  Hell No!

How does Groupon make money is actually dependent on the fact that majority of coupon buyers will not redeem the coupon!

Consider this: Groupon sells 1000 coupon of 50$ each i.e. 50,000 USD GMV out of which the partner has agreed for 50% commission “on the delivery of service/good”. ¬†So partner ideally should have got 25,000 USD, right?

Wrong!

Groupon has a redemption process in place whereby the merchant delivering the service has to keep track of the number of coupons redeemed and Groupon will then pay the equivalent amount to the merchant. ¬†Assuming out of 1000 coupons, 400 were redeemed i.e. 20,000 GMV, then the¬†merchant will get 10,000 USD and Groupon will retain 40,000 USD! Neat isn’t it.

But the major deals on Groupon don’t make money, not because the customers claim each deal, but because high margin products (high value thereby) are not many in number and require a¬†lot of efficient selling on their BD teams part to create high margin product that will sell well with the users of Groupon.

How does Groupon make Money via Advertising Fee

Similar to other ad-networks (google, amazon, facebook etc) Groupon was also one of the important element of the online presence of a product launch and thus due to its users’ huge repeat purchase behavior it used to attract a small % of the total marketing budget.

How does Groupon make Money via Sponsored Products

Due to the data behind Groupon, they very well know what sells when and how much.  Using this a dealer can use the feature of sponsored listing to have more eyeballs on its deal and thus a higher revenue.  As far as I know this was only on invitation (depending on the data behind that).

One very sleazy method that many onlookers always ignore is that the deal is bought 3 to 12 weeks in advance (sometimes 12 months in advance) and that gives Groupon some leeway with the cash, they must be investing that into liquid funds (money market instruments) to get some decent money out of that as well.

How does Groupon Work

How does Groupon Work
How does Groupon Work

Groupon works exactly like a Marketplace, where there are a¬†number of sellers for the same product or service and there are buyers i.e. multi-product, multi-vendor kind of an ecosystem. ¬†The customer once visits the website, the¬†app it then displays the available deals as a part of the customers’ search query and then the customer can decide to buy now or buy later.

Disclaimer: Groupon Business Model, How does Groupon make Money are the interpretation of the author.  Please use the information at your own discretion.  Direct copying not allowed under DMCA.  Please ask for explicit written permission before copying content.

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