Tuesday, May 17, 2011

How does Groupon make money?

After initial reluctance to voluntarily subject myself to more email every day, I signed up for Groupon and Living Social two months ago.  Now I get daily messages offering me great deals at spas, golf courses, restaurants and the like.  I have purchased only two coupons and in each instance it was for a restaurant where I regularly eat.  So who came out ahead?  If I spend $10 for a $20 coupon, then the restaurant collects $5 up front but ends up with a net loss of $15 because I was going to eat there anyway. Winners: Groupon and me.  Loser: the restaurant.

So why is Wall Street going gaga over Groupon's IPO?  Megan McArdle takes a hard look at the underlying business model.  Coupons provide another way to charge different customers different prices for the same good.  A restaurant can come out ahead if it has excess capacity and attracts new customers with deep pockets.  It can lose big-time if brigades of coupon clippers eat frugally and crowd out regular customers.  Waitstaff also may not be pleased if tips head south. 

This may just be my imagination, but I think I am seeing fewer deals being offered by established businesses and more offers coming from companies I never heard of.  In which case I am going to be hitting the unsubscribe button pretty soon. 
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22 comments:

  1. I've been trying to understand the value of this as well ... probably will be hitting unsubscribe soon as well. - Anna Rzewnicki

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  2. I think there are some merits in the groupon for merchants as well. There are a lot of consumers who are impulse buyers and will snap a deal when they see it and not end up using it. Me and my wife purchased a 2 week pass @ a rock climbing club for $20 each. My wife went for 1 class, I did not go at all. Also, this is great to attract people who would not have tried a store/activity at all because of the cost. If I go to the rock climbing club and I really like it, I might just continue and pay regular fees. Also, when it comes to restaurants, a lot of times you are getting customers who are not your regulars but are enticed by the offer. Not all consumers are as concious as Prof. Allen..Maybe they cover this in the Consumer Behavior class.

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  3. What happens if a restaurant offers $40 worth of food for $20 in Groupon. What if I call the restaurant directly and ask if they will give me $40 worth of food for $15. Merchant gets $15 in place of $10, I get food worth $40 and Groupon gets Cero.

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