How Groupon Makes Money: Direct Sales and Commissions

Since its founding in 2008, Groupon (GRPN) has become a household name among bargain hunters. The company connects customers with local commerce, primarily by selling vouchers and coupons for discounts to brick-and-mortar businesses. In this sense, Groupon generates revenue by using one of the oldest business models around: being the middleman. The company generates both product and service revenue in three categories: Local, Goods, and Travel. In some cases, consumers can purchase goods and services at discounts of more than 50% by using a Groupon voucher.

Groupon Basics

Groupon was launched in Nov. 2008 and quickly became popular for providing huge discounts to local businesses. The company went through an IPO in 2011, but since then, revenues have frequently declined due to increased competition and the struggle to maintain popularity with consumers. More recently, Groupon has shifted 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.

In its financial statements, Groupon identifies two types of income: gross billings and revenue. The gross billings number is the total income from the sale of goods and services, excluding taxes and refunds. Revenue represents the sum of transactions where Groupon acted as a marketplace minus the portion of the service or product provider. The company also receives direct revenue from sales of merchandise inventory via its online marketplaces. 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 as of Dec. 31, 2021, 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 quite easily purchase the same products directly from the businesses offering them, Groupon often offers prices far below retail. Essentially, Groupon serves as a powerful advertising engine, generating sales and stronger brand recognition for the business in exchange for a fee.

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 sign up, so participating businesses knew that they have a minimum number of customers coming in.

With the advent of card-linking deals in 2018, Groupon has enrolled close to seven million credit cards as of its last annual report. The new system aims to make the process smoother for the customer; consumers may be more likely to take advantage of multiple card-linked offerings than they would 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.

Through its Goods segment, Groupon also 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.

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.

Groupon’s 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, and of that amount, $750 goes to the salon and $750 goes to Groupon. Once a deal is advertised, consumers who purchased the Groupon receive it regardless of how many were purchased.

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

Groupon’s Product Revenue Business

Groupon’s product revenue business is somewhat more straightforward than its service revenue one. 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.

Future Plans

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

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.

Maintaining the Marketplace

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 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.