i don't understand the premise of the business yesterday.

how do the website make money?

if the trader discounts their prices by half, to get us in - then they are only going to get a still smaller fraction of that price from the website, as the web agent take their cut out of what we pay them.

is that not how it works?

that was never made clear.

My husband and I had a discussion about that too. I think in the boardroom "commission" was mentioned so I assume the website takes a percentage of the money spent on each voucher. So actually the companies must give away even more than a 50% discount if they take that into account.

Assuming that the 190 people who bought vouchers for the posh restaurant wouldn't have gone there without the vouchers, I suppose we can see why the places are willing to give away such a lot of profit.

From Wikipedia:

if a certain number of people sign up for the offer, then the deal becomes available to all; if the predetermined minimum is not met, no one gets the deal that day. This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales promotion tools. Groupon makes money by keeping approximately half the money the customer pays for the coupon.
For example, an $80 massage could be purchased by the consumer for $40 through Groupon, and then Groupon and the retailer would split the $40. That is, the retailer gives a massage valued at $80 and gets approximately $20 from Groupon for it (under a 50%/50% split). The consumer gets the massage, in this example, from the retailer for which they have paid $40 to Groupon.
Unlike classified advertising, the merchant does not pay any upfront cost to participate: Groupon collects personal information from willing consumers and then contacts only those consumers, primarily by daily email, who may possibly be interested in a particular product or service

So basically the business agrees a discount with the web site, the web site markets the deal and takes payment upfront, and then passes 50% of the revenue to the business which then supplies the goods or services to the customers. By doing it that way the web site gets the money up front from (say) 200 or even 1000 customers per deal, which is a pretty good business model. It benefits the businesses by paying them a guaranteed amount for a greatly increased number of customers, so it's a quantity discount as far as they are concerned.

The figures in the boardroom were the total sales (revenue) not comission. They kept any discussion of comission and the websites profit out of the programme as it's pretty unpalatable.

Take groupon typical figures as an example...
Spa Package £100
Offer Price 50% off £50
Groupon Comission £25
VAT* £10
Actual amount received £15

*Groupon take the full amount of VAT off your share

In addition Groupon only pay out after the customer has received the service/goods and you have to enter the customers voucher code on the website and wait to be paid, typically 30 days. If there are any unused vouchers when the deal expires groupon keeps all the money for those!

The idea is that you look at it as a form of advertising rather than a deal you make money on (or break even) and hope to come out of with increased brand awareness and hopefully some repeat customers who will pay full price. ie. people who took up the deal who come back or people who saw the deal, did not buy but now know about your business.

How groupon justifies such a high % comission I dont know!!! I guess they must spent a tonne increasing their e-mail subscriptions as they are advertised everywhere on the web and social media.

I always find groupon emails to be written in complete gobbledigook, if anyone could explain the reason for that i would be grateful!

I don't know if they are still in business but some of these websites charged a monthly fee to be a member.

It all depends on the mark up of the goods/services you want to market through the voucher system. If you are selling ice cream at £5 they may cost only 50p to produce. Sell 1,000 at £2.00 each, or in multiples of a thousand via the voucher system and you‘ll still turn a profit of £1,500 each thousand sold less whatever percentage the company take. If they take 50% you’ll remain in profit if every voucher is redeemed plus your ice cream will have been introduced to new customers who may/will be willing to buy when your ice cream goes back up to it’s full price.

I’m sure Ricky’s scallops needing everything necessary in a restaurant to cook them including the chefs didn’t cost anywhere near what the restaurant were changing.

Presumably most businesses will be VAT registered so end up paying the correct amount?

Effectively groupon sells to the customer and so they are the ones to pay the VAT to HMRC. It just happens to be in their terms and conditions that they pass the cost of it onto the business.

If you are a small business you may not normally pay VAT at all and even if you normally do, it is still not the same as you are paying vat on your share and groupons share.

Look at my example above. You would need to have a product with an £85% margin to break even. I suspect some of the 'goods' type offers may be able to do this but anything in the service industry with staff, premises etc overheads will not. Especially as there is no economies of scale in this type of thing. It is a form of advertising.
Jade knew all about it and she works in marketing.

It's not all about the holy margins. It might be offered as a loss leader to introduce new repeat customers, or for customers to buy other products.

Right... so effectively the business is paying VAT on the money it receives from Groupon plus VAT on the money it doesn't receive from Groupon? I don't suppose HMRC care who pays the bill as long as someone pays it, but it does go against the principle of VAT being a tax on the value added by each business.

I think this is the key. If you get a voucher for a 20 minute spa experience and have to travel an hour to a spa that offers it, you'd probably pay to have another treatment at full price.

The businesses must do well out of it or these sites wouldn't have been going for so long.

agree with eplaw + mrs watermelon that is how groupon is supposed to work....

however at the end of the day the risk is all with the business participating in the deal. You are rolling the dice that you can get enough exposure/repeat business/upselling to cover losses on each deal sold.

There is no risk to groupon whatsoever! Their costs are fixed and can be tightly controlled. You have no control really (over than setting a top limit) of the number of deals made and the cost to yourself.


re: the VAT issue it is confusing because it doesn't make sense! Basically it's just a bit of a con by Groupon, they don't even calculate it right (ie it should be 20% of the ex VAT but they calculate it as 20% incl VAT).

They claim they are paying VAT to HMRC on the voucher sales and pass this along as a cost to you in addition to their % commission. Although what they are charging you is called VAT it's not the same as giving you a VAT invoice so you can't claim it back if you are VAT registered.... as I understand it anyway!

Definitely against the principle of VAT to pass it along like that. Imagine if you got to the checkout at Tesco and they added another 20% to your bill because they need to pay the taxman!!!!

If you are interested how these deals work out for businesses check out the confused pepps asking questions on industry sites like the business forums, salongeek, hotel mule etc.

I'm not sure how websites like groupon are still going they seem like an appalling deal (and they really don't need to be that greedy). Maybe just burning through business directories to get as many as possible to try it out once and then the fad will be over?

I think this is a good point. I've seen other advertising fads in the past, they rely on the fast burn of a fashionable type of 'must have' advert which can attract a certain type of business for a short time.

My experience is that the business needs to be totally on top of the math to prevent making a significant loss. You can weigh the daily deal slightly to protect yourself by offering deals which do not include more service and less product or thinking of extras you can add to make the deal attractive without much more cost to you. If theatres are half full, selling half price tickets can be very good where as if you are selling cars, think carefully !!

Vouchers are complex as unless the process is designed correctly, you can get a rush of half price (or less) customers who enjoy the treat then never go back. At the moment lots of businesses are under performing so they are tempted.

That's the way things work in the USA, and Groupon is an American company.

i think the trouble is we customers often don't give them repeat business - we just move on to the next groupon

we have had some very good ones, where the traders have given repeat coupons to try and get us back in

others have not been so good

of course, with meals, you often buy extras, plus drinks, maybe a tip so the restaurant gets something back