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Using Groupon can be a whole lot of fun, but sometimes the deals are so steep that it seems impossible anyone at all is making any real money from the transaction, especially Groupon. So, how exactly does Groupon make any money, and can we count on the service being available well into the future?

Believe it or not, even though you’re saving 5 Ways To Make Use Of Groupon 5 Ways To Make Use Of Groupon Read More a lot of money in most cases, there’s more cash changing hands than you may realize. Groupon is just a middleman, handing you the deal from the business, and then handing your money over to the business.

There lies the catch. Groupon doesn’t hand over all the money you pay to the business — it takes a cut. What it boils down to is Groupon is just another advertising avenue How Facebook Advertising Works & How To Place An Advert How Facebook Advertising Works & How To Place An Advert If you've ever considered advertising on Facebook, but assumed it was completely unaffordable except for the largest companies and corporations, you may want to think again. If you've ever advertised on Google, using the pay-per-click... Read More  for local businesses, and these businesses consider the Groupon commission (and the discount they offer you) nothing more than advertising costs.

The real question we want to look into is whether this amounts to good profits for Groupon and if the company is viable enough to grow and live on well into the future.

How Groupon Makes Money

In early 2015, Groupon was valued as a $5 billion dollar company. That ain’t chump change. Of course, in the world of online services, it’s also not exactly the king of the mountain.

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To put this in perspective, Ebay is a $68.9 billion dollar company, Google is $65.6 billion, and Facebook is $36.5 billion.

Still, even those powerhouse profit machines were once valued at $5 billion as well. So, does Groupon have the same promise?

The company describes how it makes money in the following way.

“Groupon makes money by charging a marketing fee advertising and promoting their offers. In most cases, that fee is a percentage of the revenue generated by selling on Groupon.”

While it may seem unfair that Groupon takes a percentage right off the top of the revenue for the entire sale, the company justifies this by saying that Groupon customers don’t usually stop spending when they cash in their coupons.

“Merchants make money from running deals on Groupon as Groupon customers typically spend more than the value of a deal and 91% return or plan to return to the business. Plus, there’s no upfront cost to sell on Groupon—we don’t make money until you make money.”

The bottom line is that in order to increase their profits, Groupon needs to sign up more merchants. Not only more merchants, but good merchants that consumers actually want to try, and where they won’t have a horrible experience after buying the Groupons.

How Much Does Groupon Make?

According to Erin Griffith over at Fortune, Groupon is actually growing as a company, but it just isn’t making any real profit.

“It grew revenue by 24% last year. Revenue is expected to grow 11% this year. But Groupon has reported a net income loss for each year it’s been public, including last year, when it lost $73 million. That’s not likely to change, because Groupon is a company that has to overcome a bad business model.”

How exactly does one “lose” $73 million when you’re raking in the $7.6 billion people spent last year on the site?

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There are three reasons for this. In the one case, Groupon is struggling to compete in a marketplace (local, online deals 5 Best Sites To Find Cool Deals Near Your Home 5 Best Sites To Find Cool Deals Near Your Home Read More ) where there is an ever-expanding collection of competitors — Amazon Local being one of the latest and most threatening.

In order to compete, Groupon has had to ramp up its investments in marketing itself to merchants that are more popular among consumers, but that also usually means smaller-sized deals. Forbes describes it this way:

“Additionally, profits in its local business are also falling, due both to the addition of higher quality, lower take-rate merchants, and to investments to drive growth in the pull marketplace.”

The second reason is that in order to overcome competition in global markets, Groupon took on a number of acquisitions, which always piles on a company’s expenses.

“Groupon pursued international expansion through the acquisition of different businesses, which resulted in several technology platforms and business processes being adopted by the company. This in turn has led to increased expenses.”

Groupon expects to convert those to profitable businesses, but to do so the company has used the old standby of following “best practices” — a corporate buzz phrase meaning that the company applied business practices and efficiencies which are proven to work in other divisions.

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The problem is that this is usually a band-aid approach that typically only turns up very small benefits, rather than overhauling or restructuring the entire organization.

The final reason Groupon is bleeding money is mostly due to its recent tactic of turning to “direct sales” as a way to turn a faster profit with less need to constantly acquire new merchant deals.  The problem with this approach is that the margin on those sales is so small, and the competition for online deals is especially fierce — Groupon really doesn’t stand a chance.

“Additionally, this [Groupon’s focus on direct sales] has also impacted gross profit as a % of gross billings in the goods’ business, which has come down from 21% in 2012 to around 11% recently, as direct sales have lower gross margins. Since the goods’ business comprises over 50% of the overall revenues and its share is increasing, we expect this factor to negatively impact gross margins in the future.”

Groupon’s recent focus on trying to acquire more products to sell on its site Groupon: Collective Shopping For Cool Discount Deals Groupon: Collective Shopping For Cool Discount Deals Read More may very well mark the beginning of the end for the company. With many markets drying up for Groupon, especially in smaller communities that don’t enjoy the volume and variety of merchants willing to offer Groupon deals, the avenues for growth are very limited, if not completely hopeless.

What Does This Mean for You?

There are two important ways this affects you. The first is that if you’ve been a loyal Groupon user all these years, you’re going to start seeing fewer “big discounts”, like 30 to 50% off the price of local services. As Groupon tries to land bigger fish rather than small “mom and pop” shops, those discounts will likely shrink to under 15 to 20%.

In addition to this, Groupon will be placing its “goods” business front and center.

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However tempting these deals may be, the odds are pretty good that you’ll be able to find a better deal A Guide To Good Deals: How To Save Money On Everything You Buy Online A Guide To Good Deals: How To Save Money On Everything You Buy Online Online shopping makes it easier than ever to get a good deal. We've put together a short guide on how to get the best price on just about anything you might be looking for online.... Read More elsewhere online. When it comes to direct sales of online goods, there is so much competition that Groupon doesn’t really stand the chance, and you can see this with just a very quick review of its “deals” at any given time.

For example, one random deal up today is for a Hampton Forge 45-Piece Flatware Set of the Stepping Stone style for $69.97.

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It sounds like a great deal when you consider the retail price of $199.99. However, a quick trip over to Amazon Big Deal On Amazon: Kindle Countdown Deals And Amazon’s New Kindle First Service Big Deal On Amazon: Kindle Countdown Deals And Amazon’s New Kindle First Service Two back-to-back announcements offer benefits for readers on Amazon Kindle. The newly announced Kindle First service and Kindle Countdown Deals promise savings for reading buffs. Read More turns up exactly the same set for only $49.99.

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Or, another random Groupon “goods” deal — the WowWee MiP Stunt Robot for $89.99.

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31 percent off the manufacturer’s price sounds pretty sweet doesn’t it? If your son or daughter has a birthday coming up, this could be a great gift.

Except, it isn’t actually 41 percent off. You can buy it straight from the WowWee website for $99.99, so Groupon’s “deal” is actual more like 10% off. But, why buy it from Groupon when you can get it for even cheaper from the WalMart website at only $79.99?

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Oh, and at the current time, Amazon has one in stock for only $75.

These were just two random samples, and probably in a majority of the other Groupon “deals” you’ll discover the same thing — Groupon’s prices are not the lowest prices online. That’s why this segment of Groupon’s new business Groupon Shifts Focus From Daily Deals To Marketplace With A New Website Groupon Shifts Focus From Daily Deals To Marketplace With A New Website Groupon has been serving up deals since 2008, and in that time it has never done a complete redesign of its website. That's all changed now, as the company has given it a full overhaul. Read More is doomed to fail.

It’s also why you shouldn’t waste your money there.

Preparing for Groupon’s Demise

If the company remains on its current course — it’s doomed to fail. However, until that happens, there are ways you can still get some great benefit from the service.

This will be covered in quite a bit more detail in an upcoming article, but the bottom line is that there are still some amazing deals to be found if you focus only on the “local” section of the Groupon site.

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Local merchants are still turning to Groupon as a leading avenue for advertising. In most cases, they’re giving up 30 to 60 percent of the price of services and products, and that means some huge savings for you.  In the “local” market, Groupon remains one of the most frugal ways to eat out, get a massage, or go skydiving.

Maybe Groupon will be able to figure out a way to better capitalize on local deals, or some clever way to entice more local merchants into advertising on Groupon. But, whether or not Groupon folds in the end, at least you can say that you got some pretty amazing deals, and it sure was fun while it lasted.

What do you think about the latest evolution of Groupon? Is it doomed to fail, or do you think the company is on the right track? Share your thoughts in the comments section below!

Image Credit: Juan Camilo Bernal / Shutterstock.com, Slavoljub Pantelic via Shutterstock, r.nagy / Shutterstock.com, Gil C / Shutterstock.com

  1. Eric
    September 9, 2016 at 10:37 pm

    I purchased a bluetooth boom box from groupon.
    It was only 20 dollars cheaper than amazon but I got it anyway to save the 20 bucks.
    When I received the unit the box was open and initially I could not find the remote control.
    I immediately went to the Groupon site to call customer service only to find there's no phone number. So I sent two emails right away. That was two days ago and no word from them.
    Fortunately, I found the remote control taped in a cutout of Styrofoam packing.
    If I had known there was no phone number, I would not have ordered from groupon.
    From now on, I'm going to pay a little extra and get the no questions asked return policy of Amazon.

  2. Agnes
    August 19, 2016 at 12:41 am

    My cleaning business was called many times by Groupon trying to get me to run a deal on their site. I said "no way" and have never regretted it and based what I've seen and read from other cleaning businesses Groupon is nothing but a good way to lose money

  3. Dharmesh Thakkar
    July 3, 2016 at 5:16 am

    Agree with Steve Dunning every bit. Can't wait for groupon to go away, so that local businesses across the country can keep their lights on. They're running on fumes.

    If you are that deal seeker, just call the local businesses. Most clever local businesses will honor the same discount directly in store, so that they can pay their bills at least.

  4. Steve Dunning
    June 24, 2015 at 12:22 pm

    I for one would be very pleased to see them go bust quite frankly. Can't make a profit on $7.6bn? Hopeless!

    They are just terminally bad for business - take your £100 product and they want a 50% discount so you're now down to £50. Then they take 50% of that , leaving you with a £25 sale on something that originally brought in £100, a 75% reduction. Fancy working for less than minimum wage, pissing off your present customers and making sure you company is known as cheap? Here's your chance. And NO, those customers will not be upsold to , as they're cheap bottom feeders and only came for the cheap low price, no I wont buy £100 of extra drinks on that £10 meal deal, I'm Mr Cheap!

    Oh and by the way it screws the WHOLE of any market sector - cheap photo portrait session for £12? No-one will ever pay more once they see that! Which every way you slice it Groupon is the kiss of death for business. Save your money, get a decent Google ads campaign, its money much better spent!

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