Sunday, December 12, 2010

What's a Groupon Really Worth?

I spent a little time this last week looking at Groupon’s excellent GrouponWorks site. It’s the site they’ve built to help merchants understand how Groupon works. They also have a nice section about what merchants should do in preparation for their deal running on Groupon. The best part of that section is a 30 minute video: Merchant Preparation Webinar.

In the video, one of the points they make is that merchants should set the value of their Groupons so that customers will end up spending more in their first visit. The example they use is that restaurants should set the value of their Groupon at 1.5 times the price of an entrée. The assumption is that people won’t dine alone, and that they’ll immediately spend more.

Let’s dig into that a little more for a made-up restaurant that has $20 entrees. At that price point, Groupon would recommend a $30 Groupon that they’d sell for $15. For the customer, that looks great: 50% off. And for the restaurant, it doesn’t look so hot, because Groupon keeps 50% of the $15: The restaurant gets $7.50 when they’d normally get $30.

But remember, the customer is unlikely to actually spend just $30. That’s the whole point of setting the price. Let’s say you go to dinner with your friend and order an appetizer ($10), two entrees (2 x $20 = $40) and two drinks (2 x $7). At those prices, the total bill would be $64. The customer would redeem their Groupon for $30 and owe $34 out of pocket. Now, the customer has paid $15 + $34 = $49 to get a $64 dinner, a savings of 23%. The flip side is that the merchant is getting that $7.50 + $34 = $41.50 when they’d normally get $64 - a 35% haircut for them.

At those numbers, the customer is still getting a good deal, but it’s not even half of the 50% discount they were advertised. And the restaurant is only really discounting their prices by 35% - a far cry from the 75% discount they appeared to be giving away at first.

It gets to the heart of what Groupon is: a clever marketing trick. The trick is on the naïve customer who thinks they’re getting a 50% discount when they’re only getting 23% off – OR – the trick is on the merchant falling prey to savvy customers who spend only the exact value of the Groupon, forcing the merchant to give up 75% of their normal bill.


  1. Of course, there are other factors at play here.

    If the customer doesn't redeem their Groupon, the restaurant gets $7.50 for doing nothing (until Groupon fully switches to redemption-based payouts) - and the customer has paid $15 to receive nothing.

    There's also the issue of return visits. If the customer redeems their Groupon and then returns to the restaurant to pay full price the next time, the restaurant is even better off. Available data & rumors, however, suggest that the rate of return visits is actually pretty low for Groupon customers.

  2. great post, Andrew! I'm really curious to see whether Groupon sustains in the long term...

  3. I've used Groupon here in Malmö, Sweden and I must say that I mainly go for the offers where I am already a frequent customer. Though, I have so far purchased quite a few coupons for offers I haven't used. Both for common places and some I have never visited at all. They still hang on the fridge in the kitchen. I do intend, however, to make use of them some day, possible since the expiry date is quite a way off still.

  4. At least in California, if the customer doesn't redeem their Groupon they can at least receive face value from the restaurant for the cost of the Groupon. i.e an expired $15 for $30 groupon is still worth $15.