How Groupon Makes Money

Groupon (GRPN) has become a household name among bargain hunters since it was founded in 2008. But those who aren't familiar with its offerings may well ask, what is Groupon and how does it work?

Local businesses offer discount vouchers and coupons for their goods and services. Consumers who are interested in scoring a discount product or experience (like a massage or manicure) can create a Groupon account to collect their favorite deals. This means that Groupon members get deals while the businesses attract new customers. Groupon, in turn, makes money from fees paid by merchants whose customers use their coupons.

Groupon generates revenue by using one of the oldest business models around. That is, becoming the middleman between the business and the consumer. The company generates both product and service revenue in three categories: Local, Goods, and Travel. Consumers can purchase goods and services at discounts of more than 50% by using a Groupon voucher.

Groupon Basics

Groupon was launched in November 2008 and gained popularity for providing huge discounts to local businesses. The company went through an initial public offering (IPO) in 2011, putting up 35 million shares of its Class A stock at $20 per share. The company raised $700 million, making it one of the largest offerings by an internet company at the time since Google went public in 2004.

Groupon also made the decision to shift its business model away from a voucher-based approach toward a card-linking one, introducing Groupon+, wherein a customer receives cash back after using a specified linked credit card to complete a purchase of a product advertised on the Groupon platform.

But the company has come under pressure from increasing competition and the ability to remain at the front and center of its customers' minds. This has consistently been reflected in its annual revenue figures, which have frequently declined. The company receives direct revenue from sales of merchandise inventory via its online marketplaces.  In its financial statements, Groupon also identifies two other types of income:

• Gross Billings: This number is the total income from the sale of goods and services, excluding taxes and refunds
• Revenue: This figure represents the sum of transactions where Groupon acted as a marketplace minus the portion of the service or product provider

For the year ending Dec. 31, 2021, Groupon reported $2.3 billion in gross billings and $967 million in revenue. According to its 2021 annual report, the company reported an active customer base of 23.3 million, which was down from 29.5 million the year before. Net income for 2021 was $120 million and operating cash flow was $120 million.

Groupon's Business Model

Groupon sells a variety of products at deep discounts, including fashion and beauty items, vacation packages, spa services, and gift certificates to bars and restaurants. Though consumers can easily purchase the same products directly from the businesses that offer them, Groupon often offers prices far below retail. Groupon, thus, serves as a powerful advertising engine, generating sales and stronger brand recognition for these businesses in exchange for a fee.

Through its Goods segment, Groupon sells merchandise directly to customers, bypassing the voucher process altogether. Groupon's Travel segment sells travel deals, including flights and hotel stays, to customers; some of these are done via vouchers, which customers must redeem later, and others are booked directly through Groupon.

With the advent of card-linking deals in 2018, Groupon enrolled close to seven million credit cards that same year. This system aims to make the process smoother for the customer such that they may be more likely to take advantage of multiple card-linked offerings than a series of individual coupon vouchers. Further, card-linked deals allow customers to not pay until the point of service and to utilize the same deal multiple times, features that were not available with the older voucher model.

Value for Businesses

Groupon provides value to businesses. One key benefit is access to new customers. The salon in the example below could make more money—an additional $3,000 in revenues—if those same 30 people had paid full price for their services. However, it is likely that those deal-hunting customers would not have come to the salon if it weren't for the discount. Businesses are often willing to trade larger profit margins for the benefit of a swift influx of new customers.

In addition, many customers actually end up spending more than the value of the Groupon they purchase. For example, a customer who purchases the salon voucher in the above example might treat herself to a pedicure as well, since she saved so much on the initial service. If the business provides high-quality products or services, customers who initially come in because of a Groupon deal may end up becoming regular patrons.

Though businesses receive less for goods and services than they would normally charge, Groupon serves as an advertiser with enormous reach, and merchants also benefit by not having to pay for the advertisement upfront. Rather, they pay a split of revenue earned based on the deal with Groupon afterward.

Groupon appeals to business owners by promising to increase foot traffic and guaranteeing a certain amount of income. When the service first launched, Groupon deals didn't become effective until a certain number of people signed up, so participating businesses knew they had a minimum number of customers coming in.

Groupon's Revenue Business

Service Revenue Business

Groupon offers impressive discounts and coupons, serves as an advertiser, generates sales, guarantees minimum revenue, and assists participating businesses with preparations. In exchange for its advertising services and sales assistance, Groupon takes a cut of all the sales made on the website. This amount is often around 50%, depending on the vendor.

For example, assume a local salon is experiencing a slump in sales and decides to use Groupon to drum up new customers. The salon owner decides to offer a discounted cut and color service, normally priced at $100 for $50. Groupon takes 50% of the sales revenue as its service fee. The deal will generate $1,500 in revenue from 30 new customers. Of that amount, $750 goes to the salon and $750 goes to Groupon. Once a deal is advertised, consumers who purchase the Groupon receive it regardless of how many are purchased.

Gross billings in the service revenue business for 2021 amounted to $549 million.

Product Revenue Business

Groupon's product revenue business is somewhat more straightforward than its service revenue segment. In the case of direct sales of merchandise to consumers through the online marketplaces on its website and app, Groupon counts the revenue of each purchase as the purchase price received from the customer.

Gross billings in the product revenue business for 2021 amounted to $171 million.

Groupon's Key Challenges

The long-term viability of Groupon's business model is a topic of much debate. For some businesses, a huge influx of customers paying only a fraction of the retail price may actually be more work than it's worth. In addition, some critics cite a perceived decline in the quality of Groupon's offerings in recent years as an indication of its impending demise.

And like many businesses, the COVID-19 pandemic brought on new challenges and struggles. Groupon responded by implementing a restructuring plan, including cost-cutting measures like changing its workforce and exiting operations some of its global operations, namely Japan and New Zealand.

The key to Groupon's success is a robust marketplace with substantial regular transactions. If transaction rates decrease, businesses will be less likely to use Groupon's services, and the market could collapse entirely.

As the voucher model lost some of its appeal among its customers following Groupon's earliest successes, the company has had to find new ways of engaging merchants and customers. Groupon invested roughly $189 million in marketing its services and products in 2021.

Groupon has an uphill battle to increase customer interest and turn revenues around. However, the company has been actively engaged in new approaches, which seem highly promising.

Groupon's Plans for the Future

So how does the company plan to tackle some of its challenges? Groupon aims to address what it perceives to be a lag between ecommerce and local, brick-and-mortar business.

In order to help the latter catch up to the former, Groupon is focused on retooling its customer experience in order to be as efficient and seamless as possible. This means extending its platform power to merchants by allowing them to sell directly to customers through Groupon and growing its international business in order to match its larger North American branch.

The Bottom Line

Groupon became a favorite of deal-hungry consumers. And cashing in was as easy as signing up and purchasing a voucher for the best deal possible. But increased competition and shifting consumer trends have put a dent in the company's bottom line.

The internet company has undergone significant changes in recent years. This includes the shift from vouchers toward the credit card-linking deals described above. Though revenues declined throughout much of its recent history, Groupon is committed to changing in order to best serve customers and businesses alike.