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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 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 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.
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?
There are three reasons for this. In the one case, Groupon is struggling to compete in a marketplace (local, online deals) 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.
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 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.
However tempting these deals may be, the odds are pretty good that you’ll be able to find a better deal 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.
It sounds like a great deal when you consider the retail price of $199.99. However, a quick trip over to Amazon turns up exactly the same set for only $49.99.
Or, another random Groupon “goods” deal — the WowWee MiP Stunt Robot for $89.99.
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?
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 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.
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!