
Ask HN: How does Groupon make money? - scrape_it
I&#x27;m having trouble understanding how Groupon generates net profit? From what I&#x27;ve read, its sort of like a Group Buying model (https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Group_buying) ?<p>So for example, if <i>Suzy Wong&#x27;s Chinese Restaurant</i> gets 50 new customers from Groupon, which side is taking the risk here, is it not the restaurant? What if all 50 customers don&#x27;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?<p>What happens when those 50 customers don&#x27;t end up coming back, again, who benefits here?<p>Seems to me this is a careful balance of satisfying consumers &amp; business owners needs while also watching for Groupon&#x27;s bottom line?
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tlb
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.

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scrape_it
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.

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mimixco
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.

~~~
scrape_it
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?

~~~
scarface74
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.

~~~
scrape_it
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?

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

