Table of contents 1. Who are Groupons customers? ............................................................................................ 1 2. 3. 4. 5. What do Groupons customers value? ..................................................................................

1 How does Groupon provide that value? ................................................................................ 2 What is Groupons profit formula? ....................................................................................... 3 What is Groupon's business model?...................................................................................... 3

Appendix .................................................................................................................................... 4

Groupon is a social commerce website launched in 2008 that provides a platform for buyers and sellers to converge. It provides highly discounted products or services to its subscribers using a deal-of-the-day coupon. This discounted coupon is valid only if a minimum number of subscribers purchase it, thus leading to a high sales volume to the merchants.

1. Who are Groupons customers? Groupon's customers can be divided into two categories: subscribers and merchants. By the end of 2010, Groupon had a total of 51 million subscribers in 565 cities worldwide1. Subscribers are young (68% are from 18-34 and 18% from 35-44 year old) and primarily women (77%). They are well educated and mostly employed (75%). 71% have an income less than $100,000 a year (Refer Chart1) 2. On the other side Groupon pitches to merchants located locally by selling them the prospect of gaining immediate customers as well as guaranteeing promotion to thousands of potential customers3. These businesses are usually small-scale, and operate locally, selling a wide array of lifestyle products and services for example, entertainment, health, diet and fitness, accessories, travel, fashion, dining etc. As the biggest group 40% of the offered promotions are for (mostly expensive) restaurants.4

2. What do Groupons customers value? Subscribers are alerted to affordable purchase opportunities, and merchants get access to new customers in a cost-effective manner in comparison to other forms of traditional advertising mediums. The young audience of subscribers looks to Groupon as a city guide, pointing them to unexplored products or services they may have never tried, or may never have heard about. As the majority of subscribers are young people, they look forward to discounts as well. Being avid users of social media like Facebook and Twitter, they spread the word to family and friends. They primarily enjoy sharing low cost new experiences with their social circle.

The Economist Groupon Anxiety (Online-coupon firms), 17.03.2011 www.grouponworks.com, 22.5.2011 3 http://mochaguru.com/what-is-the-groupon-business-model, 23.05.2011 4 The Economist Of bits and bytes (Expensive restaurants), 12.08.2010
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As merchants are mostly local businesses, they are aiming to attract a large customer base in their region either for advertising or for an increase in sales volume. In addition, these businesses value high capacity utilization and the chance to earn some windfall profits once the customer is in the store. When customers visit merchants, they often spend more than the coupon value, and 22% of the customers revisit merchants5. As a result, Groupon has become an alternative to traditional advertising.

3. How does Groupon provide that value? Groupon provides a platform with low entry barriers that brings subscribers and merchants together. Subscribers are able to log on even with their Facebook accounts. Furthermore Groupon provides open API (Application Programming Interface) for mobile applications.6 To deliver value to subscribers , Groupon uses two methods - daily deal subscriptions and viral marketing7. Subscribers get daily emails with purchase opportunities for a limited number of high-discounted products and services. By putting minimum thresholds for coupons to be valid, Groupon encourages its subscribers to spread the Deal-of-the-day virus via social networking sites like Facebook and Twitter. Thus, the sense of urgency encourages collective buying. Due to careful selection and its large variety of offers, Groupon creates a feeling of uniqueness for its subscribers. Furthermore, Groupon is able to offer more customized products8 if subscribers are willing to provide specified data and areas of interest to the company. A high rate of signed-up merchants allows Groupon to decide which deals are promoted in the specific local community9. Once a deal is chosen the company helps to execute sales process and to compensate merchants. Compared to mass media, Groupon offers accurate and purchasedriven marketing10 by customer segmentation and provides its customer base to merchants at low advertising costs.

Observations on Groupon business model - a primer, C. Dahlen, Nov.2010 A Study on Groupon.com, V.Wu , 2009 7 Wikinomics, Groupon.com: using minimum purchase thresholds to drive viral marketing, D.Hancook, Jan 2010 8 http://www.groupon.com/pages/personalized-deals-launch, 25.05.2011 9 Behind the Deals:The Sales Department, http://www.groupon.com/blog/cities/behind-the-deals-the-sales-department, 24.5.2011 10 Undressing Groupon, A. Arabshahi, Dec. 2010
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4. What is Groupons profit formula? The business model is based on revenue sharing. As a rule of thumb you can assume that revenue is not only discounted but shared (typically, 50/50) with Groupon11, meaning that the revenue of the local Groupon partner is half of the price of the sold voucher. As there is a long list of possible merchants, Groupon today can only feature one out of eight businesses12 and thus the Groupon business model in the moment allows high margins. Furthermore, Groupon has interest revenues by dealing with the money of their customers. While subscribers have to pay in advance, merchants receive cash when the voucher is returned to Groupon. The local organization is a strategic advantage for Groupon as well as its main cost driver. To provide local-based offers in 565 cities worldwide, the company needs an army of salespeople to negotiate deals with local businesses in each city and copywriters to churn out the witty, whimsical e-mail pitches it sends out to customers.
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Thus the company has to pay wages for

4.000 employees as well as related costs for office space and administrative expenses.

5. What is Groupon's business model? Groupons business model is based on its partnership with merchants. Merchants get a high volume of customers who are offered a purchase opportunity. When subscribers buy an affiliated merchants coupon on Groupons site, the merchant is offered a percent-of-sale commission, commonly 50% of coupon selling price. Rationale for categorizing Groupon as Affiliate - Sub category: Revenue Sharing
Rappa's Affiliate Model Provide purchase opportunities Groupon Though in a slightly modified manner, Groupon also provides purchase opportunities in the form of discounted coupons to its subscribers. (Deal-of-the-day) Groupon ties up with local merchants in a revenue share model, whereby the merchants and Groupon share revenues for every subscriber that utilizes the Groupon's deal Groupon gets its revenue only when the deal is valid and the subscribers purchase the offered product/service

Offer financial incentives if revenue to affiliate partner sites Pay for performance model Revenue Sharing Sharing of sale commission after users purchasing

Only when the final customer/subscriber purchases the Groupon's deal/ coupon, Groupon gets paid its revenue share

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Meet The Fastest Growing Company Ever, http://www.forbes.com/forbes/2010/0830/entrepreneurs-groupon-facebook-twitternext-web-phenom.html, 20.5.2011 12 http://www.groupon.com/pages/personalized-deals-launch, 25.5.2011 13 Groupon anxiety, http://www.economist.com/node/18388904/print, 18.5.2011

Appendix Chart 1: Information about Groupons subscribers14

Chart 2: Example for Groupon offer Madrid, 25.05.2011

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http://www.grouponworks.com/why-groupon/demographics, 24.5.2011