DEFINITION of 'Groupon'

Groupon is a special type of coupon website that offers group deals to consumers. Groupons attempt to tap into the power of collective purchasing by offering a substantial discount, such as half off, to a group of people if they buy a product or service. Many restaurants and other retailers use Groupons in an effort to lure groups of customers into their establishments.

BREAKING DOWN 'Groupon'

The word "Groupon" is a combination of "group" and "coupon." Groupon partners with merchants by hosting a discount deal and keeping at least 50% of the profit as a marketing fee. Unlike a standard coupon, a Groupon lets consumers pay the discounted price for goods in advance by purchasing the deal. The average Groupon grants a 50% discount, but it can be as high as 90%. For example, a merchant may offer $50 worth of food for $25 or a $200 spa package for $90.

A Groupon previously included a "tipping point," which requires a predetermined number of consumers, such as 200, to make a purchase before the merchant must honor the discount. This model's design helps the business make an initial profit to cover the upfront cost of providing the service. As of 2016, Groupon no longer requires a tipping point because most deals reach high sales volumes in a short period of time.

How Groupons Work for Consumers

Consumers typically receive daily deal ads through location-specific email lists or social media sites. Each day the company advertises at least one local deal with a predetermined purchase period, ranging from a few hours to a few days. In most cases, the discount is valid for up to six months, and the Groupon is indefinitely redeemable.

Consumers use a code or printed voucher for redemption at the time of service. Since the discount is prepaid, the customer only owes the merchant for services exceeding the value of the Groupon. The "Fine Print" section of a Groupon states the unique restrictions for each deal, such as excluded days or products; however, merchants may impose unadvertised limitations upon redemption, such as a limited menu or inflated pricing for Groupon customers.

Pros and Cons of Groupons for Businesses

Groupon collects a percentage of the daily deal profit in exchange for providing merchants with a broad customer base through the company's extensive email list and social media presence. The merchant can profit from the discount if Groupon customers come back, promote the business to their friends or spend more than the value of the Groupon.

In a study of 150 businesses, Rice University, Jesse H. Jones Graduate School of Business reports that 66% of participants profited from a Groupon promotion, while 32% did not. Groupons may be unprofitable for businesses with variable operating costs, as they often need additional staff and supplies to satisfy a sudden increase in demand. Daily deals may also attract customers outside the merchant's target audience, reducing the rate of repeat business.

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