Groupon logo.
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You may have seen the ads for Groupon on Facebook.The site offers coupons for local businesses by email. “One ridiculously huge coupon each day on the best things to eat, see, do and buy in…(insert your city here)” Not rocket science in itself, but this thing has taken off like a rocket in cities across the US and the word is spread almost entirely by social media and word of mouth. The concept is simply brilliant.

Businesses offer a discount on a product or service at a 50% discount or more. Patrons buy the “Groupon” outright to be redeemed within a year at the business. So for example the local wine bar offers a tasting flight for $22 and I can but a Groupon for $11 saving me 50%.

From the vendor side here’s how it works.

Like other coupons not all of the Groupons get redeemed, but in this case the vendor still keeps the money they made on the coupon which at least partly pays for the cost of the product. Coupons are offered for only a 24 hour period and a vendor can set a minimum purchases required for each deal.

Let’s say you do a coupon with a $100 value. The buyer pays $50 to buy it and you split the difference with Groupon. Groupon currently collects all the payments and handles the transaction fees and then pays the vendor in 3 installments. The day after the offer, at the 30 day and 60 day points.

Sounds like a pretty good deal for Groupon doesn’t it? But vendors are reporting the biggest problem they have with Groupon is dealing with the inundation of requests from people buying their coupon.

Here’s Philip Greenspun’s story:

“We took our standard $225 helicopter into lesson and had Groupon sell it for $69. The fraction that they share with us will cover some of the cost of spinning the helicopter; we instructors will have to volunteer our time in order to try to convert some of these folks into long-term customers. We expected to sell 200 and hoped for 500. We figured that maybe 1-3 percent of these people would sign up as regular students, so we’d put in a few weekends of sweat and come out with 2-10 new students.

Starting just after 6 am, Groupon sent out emails to its roughly 200,000 Boston subscribers. I knew that there might be a problem when I checked a few minutes after receiving my email (I am a subscriber). They’d already sold 30. By 11:00 am, they’d sold more than 2000. We finally had to beg them to shut it down at 2600 (we could have set a limit initially but didn’t think to).”

Will they return after their huge discount? Nobody has had enough time to tell yet, but if you think of it as a marketing expense this could be an amazing opportunity for businesses to get their services in front of the crowd of people subscribed to Groupon.

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