The Groupon business model

The online business model first implemented by Groupon is a lucrative platform for online advertising companies. To date, more than 500 companies have been structured on the Groupon model, and many small businesses will benefit from their participation.

The partnership between the host site, or similar to Groupon, and local small businesses is at the heart of this business model. The host site offers online advertising and direct email contact with a network of potential customers in exchange for a marketing fee.

More specifically, the host site runs promotions in the form of coupons, offering products or services from a company at a significant reduction, often 50% below the usual retail price. The host site then collects its fee by withholding a percentage of the revenue earned from each sale, which is also typically 50%. Customers purchase coupons by visiting the hosting website or by following the links provided in the email notifications of new promotions.

While the initial profit margins for small businesses offering services may be low, the benefits of exposure to a new customer base are significant. Groupon’s business model often attracts a younger audience, one who invests in social media and can extol the benefits of a positive experience with a product or service using a variety of online social media. The buzz created among your virtual acquaintances circles has greater reach than traditional word of mouth, and possibly more influence than more expensive forms of advertising. This youth contingent is particularly open to new experiences and trends, and seeks to connect with worthwhile establishments.

Offering services through a Groupon-like site is appropriate and useful for small or relatively unknown businesses that want to develop name recognition and ultimately customer loyalty. A restaurant, for example, is an ideal candidate for a Groupon-like promotion: it is a business that aims to establish a base of loyal customers who will return regularly for repeat purchases. While new customers may be initially drawn to the lure of low prices, it depends on companies retaining new customers and building on the relationship that Groupon-like advertising offers.

Since Groupon’s business model results in companies generating a fraction of their usual costs for promoted services, the monetary benefits may not be immediate and owners must be aware of the financial risks involved. On the other hand, a revolutionary aspect of this advertising model is that you don’t pay a marketing fee if no clients show up. In short, a failed promotion does not mean any loss to the promoted business or profit for the hosting site. In addition, the provider can set a limit on the number of coupons available for a specific service and / or the duration during which the promotion is available. Coupons come with an expiration date and a limit on how many can be purchased and / or used at a time.

With regard to the future of this advertising platform, niche-specific websites are particularly promising. The Groupon business model is an effective advertising method not only for region-specific services, but also for products and services that target ethnic or cultural denominations.