Groupon’s Business Model: Unveiling Their Profitable Path

Numerous local businesses provide discount vouchers and coupons to attract customers. Groupon takes these deals, negotiates with the businesses, and presents them to consumers through an online platform.

Its revenue comes from fees paid by merchants when customers redeem their coupons, while businesses benefit from increased visibility and customer engagement.

While Groupon faces competition from companies like RetailMeNot, Rakuten, Slickdeals, and DealPlus, it continues to thrive. Here is an exploration of Groupon’s revenue streams, financial standing, and operational dynamics.

KEY TAKEAWAYS
Groupon’s revenue comes from selling vouchers and card-linked deals that connect consumers with local businesses.
The company has faced challenges with decreasing revenue, operating cash, free cash flows, and active customers.
Groupon plans to address these challenges by implementing team changes, addressing marketing and sales issues, and improving efficiency and profitability.
In March 2023, Groupon appointed Dušan Šenkypl as interim CEO with the goal of guiding the company back to growth.

What is Groupon?

Groupon is an online platform that operates on a hyperlocal level, connecting customers with local businesses through discounted deals. Initially focusing on group discounts, the company, founded by Andrew Mason, transformed into an e-commerce marketplace.

It facilitates the interaction and engagement between local businesses and customers, allowing them to discover and take advantage of enticing offers.

A Brief History of Groupon

Groupon traces its origins back to founder Andrew Mason, who launched the company during his time at the University of Chicago. Originally called The Point, it aimed to revolutionize online fundraising with the concept of a “tipping point” for campaigns to become active. Amidst The Point’s challenges, group deals emerged as a promising avenue.

The team began offering daily deals, or “Groupons,” requiring a minimum number of buyers for activation. This innovative approach benefited vendors, customers, and the company.

In 2008, The Point transformed into Groupon, focusing on time-limited deals to promote local businesses. Rapid expansion followed, with Groupon reaching 28 cities in the U.S. and expanding to European markets. Notably, Groupon declined a $6 billion acquisition offer from Google in 2010.

Today, Groupon boasts 26+ million active customers and has sold over 1.5 billion Groupons. It has evolved into a leading platform connecting consumers with enticing deals from local businesses.

Groupon’s Revenue-Generating Segments: A Closer Look

Groupon, the global coupon and savings platform, operates with two distinct revenue-generating segments: North America and International. These segments provide insights into Groupon’s financial and operational performance.

North America Segment

The North American segment encompasses Groupon’s operations in the United States and Canada. The platform aggregates coupons and deals from across the region, making it convenient for consumers to access savings. Additionally, Groupon sells third-party products through its platform.

In the first quarter of 2023, the North America segment experienced a significant decline in active customers and revenues. Groupon attributes this decline to reduced engagement on its platform, resulting in overall losses.

To acquire customers, the online platform relies on marketing efforts and offers online access to its services through mobile applications and a website. The North America segment generated $89.3 million in revenues during this period.

International Segment

Groupon extends its services to several countries worldwide, including Australia, the United Kingdom, Belgium, France, Germany, the UAE, Ireland, Italy, Poland, the Netherlands, Spain, and Quebec. While the services offered remain consistent across these international markets, Groupon tailors its focus to each specific region.

In the first quarter of 2023, the International segment generated $32.4 million in revenues. These revenue segments highlight Groupon’s global presence and its efforts to cater to both local and international markets, all while adapting to the unique dynamics of each region.

How Groupon Works

Groupon operates on a loss-leader model, luring customers with discount coupons. These reduced-price offers aim to attract and engage customers, leading to increased spending and loyalty. Groupon’s focus extends beyond essential needs, targeting young individuals eager to explore their cities affordably.

Restaurants, pubs, bars, hotels, spas, fitness activities, beauty care, cosmetic procedures, laundry services, classes, and local retailers are among the businesses featured on Groupon. Coupons typically have expiration dates, often limited to first-time customers.

Redemption periods range from 6 to 12 months, with some businesses imposing restrictions on product or service selection and coupon usage per table.

Innovatively, Groupon also offers card-linked offers. By linking debit or credit cards to the app, users receive automatic cashback or discounts, eliminating the need for physical coupons or codes.

Through these strategies, Groupon facilitates cost-effective experiences, benefiting both businesses and customers, while fostering local community exploration.

How Groupon Makes Money

Groupon primarily generates revenue by serving as a marketing and promotional platform for businesses on its website. Acting as a middleman, Groupon connects potential customers with merchants and charges a commission on each customer referred to the business.

However, the commission-based revenue model is more nuanced than it appears.

Let’s consider an example to illustrate this concept. Suppose a merchant named ‘XYZ’ collaborates with Groupon to offer a $100 service at a 50% discount, and they agree on a 50-50% revenue sharing contract. This means that for every deal sold on Groupon, XYZ earns $25, and Groupon also earns $25.

However, Groupon only shares the revenue from deals that are actually redeemed at the merchant’s store, not the total number of deals sold. To illustrate, let’s assume that out of 100 deals sold by Groupon, only 70 were redeemed:

XYZ earns: 70 * $25 = $1750

Groupon earns: (70 * $25) + (30 * $50) = $3250

The revenue sharing percentage depends on negotiations between Groupon and the merchant, as well as the specific marketing tools utilized. These tools may include product promotion, advertisements, deal of the day listings, and more.

Groupon Strategy

Groupon employs an array of marketing channels and strategies to effectively reach and engage customers, ensuring awareness of its diverse offerings. Let’s delve into Groupon’s comprehensive marketing approach:

Marketing ChannelDescription
Search EnginesUtilizes SEO and SEM techniques to increase visibility in web search results for customers seeking deals.
Email and Mobile MessagingExecutes targeted email campaigns and push notifications, delivering personalized and location-based updates.
Affiliate ChannelsCollaborates with third-party websites to promote Groupon’s offerings, earning commissions from referrals.
Social and Display AdvertisingUtilizes various social networks to promote content and offerings, adapting messaging to each platform.
Television and Offline MarketingOccasional use of connected TV, traditional TV, print, and radio advertising to raise awareness and brand recognition.

Competition

Groupon operates in a two-sided marketplace, where customers and merchants play crucial roles. To sustain its business model, Groupon faces competition from various players on both sides of the marketplace. In its area of business, Groupon encounters competition from companies that focus on specific verticals.

These competitors may possess a targeted user base, enabling them to leverage existing customers with lower acquisition costs or respond swiftly to emerging technologies and changing customer trends.

These rivals may allocate more resources to research and development, execute extensive marketing campaigns, and adopt aggressive pricing strategies. As a result, they may build a larger subscriber base or monetize their subscribers more effectively than Groupon.

Nonetheless, Groupon believes it can compete by leveraging its vast customer base and trusted brand. Additionally, the company is investing in self-service tools to empower merchants in managing demand, attracting and retaining customers effectively.

Groupon’s Business Model

Groupon operates as a multi-sided platform, serving two primary customer segments: merchants and consumers.

  • Merchants: Groupon serves businesses that benefit from its services. They can be classified by factors like business size (national brands vs local businesses), business type (Food & Beverage, Health & Beauty, Home & Auto, etc.), and business properties (deal types, location, opening times, price, etc.);
  • Consumers: Groupon caters to individuals who purchase its coupons. They can be segmented based on geodemographics, interests (especially related to the type of coupons acquired), and behaviors (browsing history, social network sharing, rating habits, search history, etc.).

Groupon’s Value Propositions

Consumers benefit from:

  • Saving money while discovering new things;
  • Inspiration to try new experiences;
  • Risk reduction in experimentation through the review system, price comparisons, and Groupon as a secure payment platform.

Merchants benefit from:

  • Free marketing and advertising;
  • Access to customer information;
  • Marketing and editorial assistance;
  • Revenue from unredeemed coupons.

Channels:

  • Website;
  • Mobile applications and app stores;
  • Merchant portal and app;
  • E-mail offers;
  • Push notifications;
  • Card-linked offers;
  • AI voice assistant;
  • Customer support;
  • Search engines;
  • Social media;
  • Merchant tools;
  • Advertising means;
  • Development team.

Customer Relationships:

  • Marketing and promotion;
  • Collaboration with merchant development;
  • Merchant tools;
  • Review system;
  • Offering a wide variety of options;
  • Reliable brand management.

Revenue Streams:

  • Groupon’s revenue streams primarily rely on commissions earned from all platform sales.

Key Resources:

  • A diverse selection of deals and discounts;
  • Relationships with local businesses and national brands;
  • A large user base;
  • Branding and intellectual property;
  • The platform itself (website and app);
  • Consumer data;
  • Human resources.

Key Activities:

  • Growing the marketplace by attracting consumers and adding merchants;
  • Marketing and customer engagement;
  • Expansion to new cities;
  • Enhancement of merchant tools;
  • Advertising and promotion;
  • Customer experience management;
  • Support and maintenance.

Key Partners:

  • Local businesses (prioritized partners);
  • National brands;
  • Search engines and social media platforms (for advertising);
  • Payment providers (especially credit card companies for card-linked offers);
  • Affiliate networks;
  • Tech companies, regulators, investors, and lobby groups.

Cost Structure:

  • Credit card and processing fees;
  • Technology maintenance;
  • Web hosting;
  • Inventory;
  • Online and offline marketing;
  • Sales commissions;
  • Team salaries;
  • General and administrative expenses.

SWOT Analysis

Strengths:

  • Skilled Workforce: Groupon prioritizes training and development programs to foster a talented and motivated workforce;
  • Strong Brand: Groupon has established a reputable brand, providing an advantage for diversifying into new product offerings;
  • Reliable Suppliers: The company benefits from a dependable supplier base, enabling a wide range of products and services;
  • Automation: Groupon’s automated processes ensure consistent quality in its operations;
  • Loyal Community: Groupon has built a dedicated consumer community that contributes to its ongoing success.

Weaknesses:

  • Innovation: While Groupon’s product continues to generate sales, it faces competition from both direct and indirect rivals, including major eCommerce platforms. To sustain its market share, Groupon must invest in new technologies and processes;
  • Expansion Obstacles: Groupon’s current structure may hinder its ability to successfully expand into new product segments;
  • Research and Development Gap: Despite investing in research and development, Groupon falls behind other industry players in terms of innovation, failing to introduce fresh ideas to the market.

Opportunities:

  • Reduced Transportation Costs: Lower shipping expenses create an opportunity for Groupon to improve margins and attract new customers by offering savings;
  • Post-Recession Market: The economic recovery after a recession, coupled with the impact of lockdown measures, presents an opportunity for Groupon to attract new customers who are seeking value-oriented deals;
  • New Market Entry: Favorable government agreements and taxation policies create opportunities for Groupon to enter new markets and further enhance profitability in existing ones.

Threats:

  • Intense Competition: The straightforward nature of Groupon’s business model has led to increased competition, resulting in lower profit margins and a risk to its market share;
  • Workforce Shortage: The limited availability of skilled employees who can support Groupon’s global expansion initiatives may hinder the company’s growth potential;
  • Regulatory Challenges: Groupon may encounter challenges due to differing laws and regulations, as well as the acceptance of its policies in the various countries where it operates.

Conclusion

Despite holding a substantial market share globally, Groupon is actively seeking avenues for expansion due to recent declines in market share. However, the company’s robust and well-structured business model provides a promising opportunity to attract new customers and reinvigorate growth.

By leveraging its strengths and capitalizing on identified opportunities, Groupon can captivate a fresh generation of customers, reestablishing its market presence and fostering sustained success.