Groupon has created a new business model for digital coupons that is very successful. It allows local businesses to advertise deals and discounts, which attracts new customers. For businesses, using Groupon is free and Groupon takes a cut of each sale. Groupon works by offering daily deals but only activating the deal if a minimum number of people sign up. This guarantees business owners new customers. However, Groupon may not be right for all businesses, as discounts can reduce brand value and businesses need to have high enough profit margins to offset the discounts. While Groupon brings in new customers, businesses must also focus on retaining customers after their Groupon purchase to see ongoing benefits.

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GROUPON
WHY THE BUSINESS MODEL JUST WORKS —
FOR SOME
by Gregg Stewart
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This article appeared in the September 2010 issue of SES Magazine. Contents are copyrighted by TMP
Directional Marketing, 15miles and SES Magazine.
What Is Groupon?
The concept of couponing is nothing new. Coca‐Cola created the idea in 1887 as a way to offer soda
samples to potential customers. Nearly 123 years later, couponing has become a billion‐dollar industry,
thanks, in large part, to e‐coupons that are outpacing print coupons 10:1. In 2009, digital coupons alone
saved consumers more than $858 million, a 170‐percent increase over the year prior.1 And from July
2009 to July 2010, more than 46.4 million American consumers used online coupons, resulting in more
than $1 billion in savings — year‐over‐year growth of 100 percent.2
Like every industry, couponing has had to adapt to changes in technology and media to reach consumers
with relevance. What started as simple promo codes for e‐retailing has morphed into a popular breed of
e‐couponing that is changing the sales‐promotion game. That’s because the couponing business model
has been refreshed to keep pace with today’s consumers.
Chicago‐based Groupon — one of many recent start‐ups to test the new style of couponing — is thriving
beyond anyone’s initial predictions (I came across one report that called the service “digital coupons on
steroids”3). By now, I’m sure you’ve heard that Groupon was valued at $1 billion earlier this year, making
it the frontrunner in the e‐couponing industry and a part of an elite group of Web 2.0 start‐ups that
have reached the milestone. As the market leader, Groupon, which could reach 150 markets worldwide
by 2011, has quickly gone mainstream to generate hefty consumer savings (more than $336 million
since its November 2008 launch) through the sale of approximately 7.7 million units (e.g., Groupons).
In short, Groupon borrows its business model from The Point, which is the company behind the e‐
couponing service. Through collective action, Groupon “works as an assurance contract: If a certain
number of people sign up for the [daily deal in each local market], then the deal becomes available to
all; if the predetermined minimum is not met, no one gets the deal that day.”4 For businesses, it’s free to
advertise on Groupon; the service simply takes a cut from each sale.
Groupon Is Cross Platform
Why has Groupon been able to impact sales generation for so many local businesses, while remaining
profitable for itself? Unlike print coupons that are one dimensional, digital coupons have the potential
to go cross platform, combining different marketing facets:
• Online: Register online.
1
Coupons.com, press release, “Growth of Digital Coupons Outpaces That of Printed Newspaper Coupons 10 to 1:
Coupons.com Reports 2009 Growth and Year‐End Milestones,” 10 February 2010.
2
Coupons.com, press release, “Growth of Digital Coupons Outpaces That of Printed Newspaper Coupons by 10 to
1, According to New Data Released by Coupons.com: Savings Printed in Last 12 Months Exceeds $1 Billion; June
Sets Monthly Printed Savings Record,” 26 July 2010.
3
Location Awhere, blog, “Would the further localization of Groupon still work?” 21 May 2010.
4
Wikipedia.
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• Local: Upon registration, indicate your local market to receive offers. In this way, Groupon can
geographically segment and target subscribers, based on radius.
• E‐mail: Receive a daily Groupon e‐mail.
• Online (again): After clicking the e‐mail’s call to action, redirect to a promotional landing page
to purchase. Rather than receive daily e‐mails, visit a custom URL (e.g.,
Groupon.com/Milwaukee) for your market.
• Mobile: In lieu of e‐mails, download the GPS‐enabled app to browse and redeem local deals (no
printer required).
• Social: The landing page showcases user reviews about the featured business, facilitating online
conversations among shoppers.
• Offline: Groupon, like many social‐commerce services, drives offline response, as customers
must visit the businesses to redeem the deals.
Groupon Is Lead Generation
$11 MILLION
What makes Groupon so appealing is its lead‐generation
Marking Groupon’s largest national effort
potential. Not only does your business gain local brand to date, Gap offered $50 worth of clothing
exposure among thousands, you’re also advertising to an for $25 on August 19 in 85 markets.
audience that may not know of you or may not shop with >>Learn more at ClickZ Stats by visiting
you under normal circumstances. With a discount, they are ClickZ.com
more apt to try something “new,” which equates to new
foot traffic. Remember, to get the daily deal, a minimum
number must take action, guaranteeing you paying
customers, who, according to Groupon, spend 60 percent above the value of the digital coupons.
Groupon Is Audience Savvy
Audience awareness is critical to Groupon’s success:
• Fifty percent of Groupon users go out at least two times per week (an established base of offline
activities). In fact, Groupon claims that 92 percent of business owners believe the service brings
in eager, “quality” customers, who are committed to spending because they already purchased
the deal.5
• ExactTarget states that 58 percent of consumers start the day by checking e‐mail, making
Groupon a viable platform.6
• Sixty‐eight percent of Groupon users are 18 to 34. This is significant, considering more than 90
percent of online consumers, aged 18 and up, subscribe to permission‐based e‐mails.7 Securing
permission first increases your chances of eliciting positive response (e.g., higher open rate),
versus traditional, “invasive” marketing.
• Groupon’s key age demographic consists of cross‐platform adopters; 95 percent who follow
brands on Facebook or Twitter also subscribe to commercial e‐mail, and 70 percent follow
brands on both Facebook and Twitter.8
5
http://www.grouponworks.com
6
Exact Target, Subscribers, Fans and Followers.
7
CrossView, press release, “Shoppers Prefer Email Promotions Over Social Media, Survey Shows,” 14 July 2010.
8
Ibid.
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• The aforementioned statistic indicates habitual users of social media. According to Royal
Pingdom, 18‐to‐34‐year‐olds comprise the largest segment of users across the 19 social‐
networking sites studied.9 Factor that into Groupon’s concept of relying on users to share offers
via Facebook, Twitter, etc., either by clicking the social‐share icons embedded in the daily
landing pages or by engaging in independent word‐of‐mouth advertising. The importance
behind this is twofold: 1.) No one gets the daily deal if enough customers don’t register (it
benefits users to spread the word), and 2.) users are rewarded with Groupon credits for
recommending others (the viral buzz attracts new customers).
Groupon Is Risky?
While Groupon seems like a sure‐fire bet for local businesses, one common question I get asked is,
“Does it generate brand loyalty, or are users likely to shop around to secure deep discounts?”
Groupon is a discount service, so companies have a legitimate concern about its ability to cheapen
brands. But bear in mind that Groupon, at its core, is meant for local businesses with limited exposure;
it’s not really meant for luxury brands. That’s because an underlying motivation behind Groupon’s deep
discounts is the facilitation of less risk for the customer who is unfamiliar with your business.
As more sites appear, discounts will become easier to obtain, which could teach consumers to seek
discounts first, then quality. But, in the end, your product must drive revenue. It’s Groupon’s function to
get customers to your doorstep; after that, it’s up to you. Have you taken an introspective look at your
own brand? If your product (and the experience to secure the product) is quality, then most advertising
platforms will work.
Consider that Groupon works best when your gross profit margin is greater than 50 percent of your
retail price. That’s why Groupon caters to and is alluring for businesses that boost profit through add‐on
sales (e.g., restaurants and spas). For example, let’s pretend you own a spa that offers $200 massages.
$200 x 50% (discount) = $100
$100 x 50% (Groupon fee) = $50
Your revenue = $50
My recommendation is to closely analyze your business’ goals and objectives, and factor in whether
Groupon will work for you. As you strategize, ask yourself if you have slim profit margins. Can you justify
cutting your price in half? Can you make a profit through volume? What discount percentage will
generate sales volume? Will price reduction create enough repeat business and/or above‐Groupon
spending to be profitable? These questions may help you determine alternate avenues.
9
Royal Pingdom AB, “Study: Ages of Social‐Network Users,” 16 February 2010.
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Conclusion
If this business model works for you, Groupon can be a profitable lead‐generation tool. But be aware of
settling in as Groupon does the work. While Groupon can generate new foot traffic, it’s up to you to
create repeat business. Plan now for how you will keep customers coming back. You could develop a
loyalty program with incentives to entice repeat sales. Or, through e‐mail or social media, follow up with
first‐time customers with an exclusive offer. Whatever you do, strategize about bringing customers
incentives in ways that don’t deplete your margins.
About the Author
A 20‐year veteran of local‐search marketing for Fortune 500 companies, Gregg Stewart
is vice president of interactive at TMP Directional Marketing and is president of its
interactive‐services division 15miles. As the world’s largest local‐search agency,
TMPDM called upon Stewart to lead the charge of transitioning from a traditional
agency to a comprehensive media firm. He was responsible for assembling high‐
performance teams that developed digital solutions to yield sales‐generating results at
the local level.
@greggstewart
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