How Groupon makes money

Since its establishment in 2008, Groupon (GRPN) has become a household name among bargainers. The company primarily connects customers with local businesses by selling discount coupons and coupons to brick-and-mortar businesses. In this sense, Groupon creates revenue by using one of the oldest business models: being a middleman. The company generates product and service revenue in three categories: local, merchandise, and travel. In some cases, consumers can use Groupon vouchers to purchase goods and services at a discount of more than 50%.

Groupon was launched in November 2008 and quickly became popular due to offering huge discounts to local businesses. The company conducted an initial public offering in 2011, but since then, due to increased competition and difficulty maintaining consumer visibility, revenue has often fallen. Recently, Groupon has changed its business model from a voucher-based approach to a combined card approach, that is, customers will receive cash back after completing the purchase of advertised products on the Groupon platform using a designated associated credit card.

In its financial statements, Groupon identified two types of revenue: general bills and revenue. The total bill is the total revenue from the sale of goods and services, excluding taxes and refunds. Revenue represents the sum of Groupon’s transactions as the market minus the portion of the service or product provider. The company also derives direct income from merchandise inventory sales through its online marketplace. For the year ended December 31, 2018, Groupon reported total revenue of US$5.2 billion and revenue of US$2.6 billion. According to its 2018 annual report, Revenue decreased from the previous year’s 2.8 billion US dollars. As of December 31, 2018, the company reported an active customer base of 48.2 million, down from 49.5 million in the previous year. Net income in 2018 was US$2 million and operating cash flow was US$191 million.

Groupon’s business model

Groupon sells a variety of products at substantial discounts, including fashion and beauty products, vacation packages, spa services, and gift certificates for bars and restaurants. Although consumers can easily buy the same products directly from the companies that provide them, Groupon’s prices are usually much lower than the retail price. In essence, Groupon is a powerful advertising engine that can generate sales and stronger brand awareness for companies through fees.

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Although the revenue that companies get from goods and services is lower than the fees they usually charge, Groupon has great influence as an advertiser, and businesses benefit from not having to pay for advertising upfront. Instead, they will pay a portion of their income based on subsequent transactions with Groupon.

Groupon attracts business owners by promising to increase the flow of people and guarantee a certain amount of income. When the service was first launched, Groupon transactions did not take effect until a certain number of people signed up, so participating companies knew they had the least number of customers entering.

With the advent of credit card linkage transactions in 2018, as of the last annual report, Groupon has registered nearly 7 million credit cards. The new system is designed to make the customer’s process smoother; consumers may be more likely to take advantage of multiple card-related products than a series of individual coupons. In addition, transactions associated with the card allow customers to not pay before the point of service and use the same transaction multiple times. These features are not available in the older coupon model.

Through its merchandise department, Groupon also sells merchandise directly to customers, bypassing the voucher process altogether. Groupon’s travel department sells travel deals to customers, including air tickets and hotel accommodation; some of them are done through vouchers, which customers must redeem later, while others book directly through Groupon.

Groupon provides value to the enterprise. A major advantage is the acquisition of new customers. The salon in the example below could make more money—an additional $3,000 in income—if these 30 people paid the full price for their services. However, if it weren’t for discounts, those looking for deals would most likely not come to the salon. Companies are usually willing to exchange higher profit margins for a rapid influx of new customers.

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In addition, many customers’ final expenditures actually exceed the value of the Groupon they purchased. For example, in the example above, the customer who bought the salon coupon might also give herself a pedicure because she saved a lot on the initial service. If a company provides high-quality products or services, customers who initially came in because of Groupon transactions may eventually become regular customers.

Key points

  • Groupon makes money by selling vouchers and card-related transactions that connect consumers with local businesses.
  • In many cases, the company also sells goods directly to consumers.
  • Groupon has shifted its focus to card-related transactions to simplify customer processes.

Groupon’s service revenue business

Groupon offers impressive discounts and coupons, acts as an advertiser, generates sales, guarantees a minimum income, and assists participating companies in preparation. In exchange for advertising services and sales assistance, Groupon takes a draw from all sales on the site. This amount is usually about 50%, depending on the supplier.

For example, suppose a local salon has a decline in sales and decides to use Groupon to attract new customers. The salon owner decided to provide discounted tailoring and color services at a price of $50, usually priced at $100. Groupon collects 50% of sales revenue as a service fee. This transaction will generate $1,500 in revenue from 30 new customers, of which $750 will be used for salons and $750 will be used for Groupon. Once an advertisement is traded, consumers who have purchased Groupon will receive it, regardless of how much they have purchased.

The total revenue of the service revenue business in 2018 was US$3.77 billion.

Groupon has acquired numerous competitors, including daily trading service LivingSocial, UK-based Cloud Savings and analytics company Swarm Mobile.

Groupon’s product revenue business

Groupon’s product revenue business is more direct than its service revenue business. In the case of direct sales of goods to consumers through the online marketplace on its website and apps, Groupon calculates the revenue from each purchase as the purchase price received from the customer.

The total revenue of the product revenue business in 2018 was US$1.43 billion.

Groupon cooperates with other markets, including GrubHub and Live Nation, to increase the number of sellers on its platform.

Future plan

Groupon aims to solve what it considers to be the lag between e-commerce and local physical businesses. To help the latter catch up with the former, Groupon focused on reorganizing its customer experience to be as efficient and seamless as possible, extending its platform power to merchants by allowing them to sell directly to customers through Groupon and expanding its platform capabilities. International business to match its larger North American branch. In recent years, the company has undergone major changes, including the shift from vouchers to the aforementioned card-related transactions. Although revenue has been declining for most of its recent history, Groupon is committed to change in order to provide the best service to customers and businesses.

Main challenge

The long-term viability of the Groupon business model is a controversial topic. For some companies, the large influx of customers paying only a fraction of the retail price may actually work more than its value. In addition, some critics regard the significant decline in the quality of Groupon’s products in recent years as a sign of its imminent demise.

Maintain the market

The key to Groupon’s success is a strong market with a large number of regular transactions. If the transaction rate drops, companies will be less likely to use Groupon’s services, and the market may collapse completely. Since the coupon model lost some of its appeal after Groupon’s earliest success, the company had to find new ways to attract merchants and customers. In the past year, Groupon has also invested approximately US$400 million in marketing its services and products, and also aims to increase customer engagement.

Groupon faces an uphill battle to increase customer interest and reverse revenue. However, the company has been actively participating in new methods, which seems promising.

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