For consumers, the deal is simple. Sign up for free, and get an email every day or so with a “groupon” – an offer for a deep discount on a local purchase, good only if some minimum number of people participate. Discounts cover a broad array of products and services, including restaurants, gyms, spas, supermarket shopping sprees, etc. Most customers are well-educated, single (49%) women (77%) under the age of 35 (68%).
For providers of goods and services, groupons generate significant one-time revenue, and the chance to attract potential repeat customers. As an example, a NYC day spa recently ran a groupon for hot stone massages. They reduced their retail price by 59%, from $120 to $49. In return, they sold 2,267 massages, generating over $110,000 in revenue (time to hire more masseuses!).
For groupon itself, the business model is highly attractive. They take a 50% cut of groupon purchases, and are supposedly on track to generate $350 million gross / $175 million net revenue in 2010. Better yet, groupon is highly viral. Since consumers only get their discount if others purchase, they eagerly spread the word via email, twitter, Facebook, etc. That’s enabled groupon to attract millions of customers with little to no marketing expenses.
How’s it working? Groupon launched late in 2008, sold a million groupons in their first year, and have sold three million to date. They reached break-even in just six months, and the business supposedly throws off $1 million per week in profits. Originally in Chicago, groupon has since rolled out to 40 cities. And investors have noticed. Groupon has raised over $130 million, most recently at a valuation in the range of $1.35 billion. 60+ other companies have copied the Groupon approach, including GroupSwoop, ScoopSt, SocialBuy, BuyWithMe, SwoopOff, MyDailyThread and LivingSocial. And at least two companies have created aggregators that scour the web for the best offers each day.
How much room is there for growth? It’s anybody’s guess, but the evolution of the email newsletter business may hold some clues. In that space, a few major players dominate big categories (e.g. Daily Candy for 20-something women, Thrillist for 20-something men) and a long tail of niche companies concentrate on particular market segments and product / service categories – with varying degrees of success.