Groupon: The awesome power of collective

Published: June 27, 2011

The startup which many doubted would survive, is big enough to say no to Google.

Groupon, if you still haven’t heard, is an innovative, collective bargaining site of sorts that just announced plans for an IPO. Groupon allows customers to purchase products such as a diving excursion, electronic gadgets or anything for that matter, at genuinely deep discounts with a small catch: a certain minimum number of people must purchase the product for the discount to be redeemable, otherwise the deal falls through. The business is a resounding success and has generated some interesting discussions and analysis among analysts and amateurs alike.

Since Groupon discounts can only be redeemed if at least a certain number of customers purchase the product, it pushes the onus of marketing on the customers themselves. A customer may purchase a spa treatment at 50% off but the purchase only goes through if a 100 people make the same purchase. It goes without saying that the same customer will likely tell his friends and family due to the self-serving interest in doing so—getting a 50% discount. Plus, it’s more fun spending a day at the spa with a bunch of friends.

For businesses, the margins can often be very slim but it works out great anyway. Groupon pays the businesses immediately upon completion of the fire sale. A hundred spa treatment selling for $100 will generate or can generate $10,000 in one day which is great for a small business. This free cash flow not only provides some sense of security but it also allows businesses to plan ahead — possibly hire a few extra hands or plan some other cross-sells for the hundred customers expected in the following month. Nothing can be better than getting paid in advance and have the customers all lined up.

A lot of businesses have even taken to Groupon as loss-leaders. For a business just starting out, the marketing and publicity is more important than big profit margins. While advertising on billboards and in publications is great, it is hard to measure the exact impact of those advertisements and plan for the number of customers expected. But the Groupon model guarantees a fixed number customers and a fixed revenue from those customers within a set number of days. Publicity that generates cash flow and guarantees customers is even better than it sounds. Since the spa knows that a hundred customers will be walking in next month before their deal expires, they can plan for other cross-selling opportunities such as selling bath oils, towels and so forth. For this reason, eager startups will even sell at a loss and write it off as a marketing cost.

Groupon, a three-year old startup out of Chicago announced this past Thursday that it is intending to go public with a valuation of about $20 billion with an initial float of $750 million. The company generated $30 million in revenues in the first year and boasts 83 million subscribers across 43 countries. As recently as December, Groupon rejected a $6 billion takeover bid from Google.

The writer heads Online Strategy and Development at Express Media and can be contacted at aleem.bawany@express.com.pk

Published in The Express Tribune, June 27th, 2011.

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Reader Comments (4)

  • Fahad Ahmed
    Jun 27, 2011 - 6:40PM

    Hi Aleem,

    Excellent idea must say, I myself am working as a software engineer.In fact you can take a look at the following link that is a replica of the groupon concept .

    But if such a business does gets started in Pakistan, I think that it will not be as successful as Groupon, reason being that internet users are not still up to the mark for such offers .Recommend

  • Quantum
    Jun 27, 2011 - 6:49PM

    Oh wow. Another scheme to promote and encourage mass-consumption of goods and services which many of us could do well without. Just what the world needs, another enterprise out to fleece us.Recommend

  • Asad
    Jun 27, 2011 - 11:58PM

    @Quantum you are criticizing just for the sake of criticizing. You are welcome not to use it leave it those who want to use it enjoy discounts on things they use or places they frequent or services they use.Recommend

  • Omar
    Jun 28, 2011 - 8:03AM

    “A hundred spa treatment selling for $100 will generate or can generate $10,000 in one day which is great for a small business.”

    I buy them often and it is a great concept. One correction though, Groupon takes 60% of already discounted price. So a spa treatent which is regular $200 and now is at Groupon at $100. Spa owner now takes $40. Groupon makes a fortune of this. But since it is popular with services, business owners can manage that and consider it a marketing expense.Recommend

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