• Tue. Nov 29th, 2022

How Groupon Makes Money: Direct Sales and Commissions

ByChad J. Johnson

Jul 28, 2022

Since its inception in 2008, Groupon (GRPN) has become a household name among discount hunters. The company connects customers to local commerce, primarily by selling vouchers and discount coupons to physical businesses. In this sense, Groupon generates revenue through the use of one of the oldest ways of doing business: being the middleman. The company generates each product and repair revenue in three classes: Native, Items and Journey. In some cases, shoppers must purchase items and businesses at discounts greater than 50% through the use of a Groupon voucher.

Groupon was launched in November 2008 and quickly became fashionable for offering deep discounts to local businesses. The company went through an IPO in 2011, but since then revenues have steadily declined due to high competition and a struggle to secure recognition with buyers. More recently, Groupon shifted its business model from a voucher-based strategy to a card-linked strategy, introducing Groupon+, in which a shopper receives cash again after using a linked bank card specific to complete a purchase order of a product sold on the Groupon Platform.

In its monetary statements, Groupon identifies two types of revenue: gross billings and revenue. The gross billing quantity is all revenue from the sale of items and businesses, excluding taxes and refunds. Revenue represents the sum of transactions where Groupon acted as a market minus the share of the service or product provider. The company also receives direct revenue from merchandise inventory sales through its online marketplaces. For the 12 months ending December 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 buyer base of 23.3 million as of December 31, 2021, up from 29.5 million the previous year. Internet revenue for 2021 was $120 million and working money circulation was $120 million.

Groupon Business Model

Groupon sells a lot of products at very low prices, including trendy and amazing gadgets, travel packages, spa companies and gift certificates to bars and restaurants. Although shoppers can easily buy the same product instantly from the companies that supply them, Groupon usually offers prices well below retail price. Groupon primarily serves as a powerful promotion engine, producing sales and stronger model recognition for the business in exchange for payment.

Although businesses get much less for items and businesses than they would usually cost, Groupon serves as an advertiser with enormous reach, and retailers also benefit from not having to pay for the business upfront. To some extent, they pay a split of earned revenue based on the relationship with Groupon afterwards.

Groupon caters to business owners by promising to extend site visitors on foot and guaranteeing a certain amount of revenue. When the service first launched, Groupon’s offers only proved effective when a certain number of people signed up, so collaborating businesses knew they had a minimum number of incoming customers.

With the arrival of card-linking offers in 2018, Groupon has enrolled nearly seven million bank cards as of the date of its final annual report. The brand new system aims to make the process smoother for the buyer; shoppers might also be more likely to take advantage of multiple card-linked choices than they would a series of individual coupons. Additional card-linked offers allow customers to skip pay-to-service and get the most out of the same offer over and over, options that didn’t exist with the old voucher model.

Through its Items phase, Groupon also sells merchandise to customers, completely bypassing the voucher process. Groupon’s Journey phase sells travel deals, as well as flights and lodge stays, to customers; a few of these are done via vouchers, which customers must redeem later, and others are booked instantly via Groupon.

Groupon delivers value to businesses. One of the main benefits is the entry of new customers. The salon in the example below could make more money – $3,000 in extra revenue – if those same 30 people had paid top dollar for their businesses. Still, it’s likely that those customers looking for deals wouldn’t have come to the show if it weren’t for the low cost. Businesses are sometimes eager to trade higher revenue margins for the benefit of a rapid influx of recent customers.

Plus, many shoppers really end up spending more than the value of the Groupon they’re buying. For example, a shopper who buys the salon voucher in the above case could also take care of a pedicure, because he saved a lot on the preliminary service. If the company offers high-quality services or products, the customers initially available through a Groupon offer could turn into mutual customers.

Key points to remember

  • Groupon generates cash through the sale of vouchers and card-linked offers, which match shoppers with local businesses.
  • The company also sells items to buyers in many cases.
  • Groupon has focused on card-linked offers in an effort to streamline the process for shoppers.

Groupon’s Service Revenue Business

Groupon offers spectacular discounts and coupons, serves as an advertiser, generates gross sales, ensures minimal revenue, and helps partner businesses prepare. In exchange for its promotional services and sales assistance, Groupon pays for all sales made on the Website. This amount is usually around 50%, depending on the seller.

For example, suppose a neighborhood salon experiences a drop in gross sales and decides to use Groupon to attract new customers. The salon owner decides to provide a lesser and reduced coloring service, usually priced at $100, for $50. Groupon takes 50% of gross sales revenue as service payment. The deal will generate $1,500 in revenue from 30 new customers, and of that amount, $750 will go to the salon and $750 to Groupon. As soon as an offer is marketed, shoppers who bought the Groupon get it regardless of the number of purchases.

Gross billings within the services revenue business for 2021 were $549 million.

Groupon has acquired several rivals, including daily deals service LivingSocial, UK-based Cloud Financial Savings and analytics firm Swarm Cellular.

Groupon’s Product Income Enterprise

Groupon’s product revenue business is much simpler than service revenue. In the case of direct sales of goods to buyers through the online marketplaces on its website and app, Groupon counts the revenue from each purchase as the purchase price obtained from the buyer.

Gross billings within the product revenue business for 2021 were $171 million.

Groupon is partnering with other marketplaces, including GrubHub and Live Nation, to expand the number of sellers on its platform.

Future plans

Groupon aims to manage what it perceives as a disconnect between e-commerce and the native brick-and-mortar business. In order to help the latter catch as much as the former, Groupon is focused on retooling its customer expertise to be as eco-friendly and transparent as possible, extending its platform power to retailers by enabling them to sell to customers through Groupon and growing its global business to match its largest North American department. The company has undergone significant changes lately, including the discontinuation of vouchers and the card-linking offers described above. Although revenues have continued to decline over much of its current history, Groupon is committed to change to better serve customers and businesses.

Main challenges

The long-term viability of Groupon’s business model is the subject of much debate. For some businesses, a massive influx of buyers paying only a fraction of retail value can be more work than price. Additionally, some critics cite a perceived decline in the quality of Groupon’s picks lately as a sign of its impending demise.

Support the market

The key to Groupon’s success is a strong marketplace with substantial joint transactions. If transaction fees go down, businesses will be much less likely to use Groupon companies, and the market could crash altogether. Because the coupon model lost some of its appeal following Groupon’s early success, the company had to discover new methods of engaging retailers and customers. Groupon invested approximately $189 million in advertising and marketing its businesses and merchandise in 2021.

Groupon has an uphill battle to expand shopper curiosity and shift revenue. Nevertheless, the company has actively engaged in new approaches, which seem extremely promising.