Online sales: How Groupon works

Publish Date: 
Feb 1, 2011
By Cynthia Furey

Rodeo Drive, a high-end retail store based in Louisville, Ky., recently advertised a coupon aimed at drawing in new customers: $50 spent up front for $100 worth of merchandise in the entire store. The result? Customers with coupons in tow spent much, much more.

“The average customer ticket was $400,” says Groupon spokesperson Chad Nason. “And that’s exactly the result we’re looking for in these deals.” Groupon, the company behind Rodeo Drive’s promotion, is a website and e-mail service that helps local retailers attract new business through “daily deals” or “Groupons” (a play on the word “coupon”). It operates as a “flash sale” — a sale that lasts for a very limited time, usually from 24 to 48 hours.

A Groupon representative tailors a deal that meets the needs of the individual retailer. In Rodeo Drive’s case, it was a coupon that was bought up front, to be redeemed in-store. (Other retailers have opted for discounts on services, or products.) The deal is then e-mailed to Groupon subscribers on a scheduled date, and they have a 24-hour period in which to purchase the deal. If enough people buy it, the deal becomes valid and subscribers who purchased it are sent vouchers the next day. If the minimum number of buyers (a number agreed upon by Groupon and the individual retailer) isn’t reached, then the deal is off, and subscribers aren’t charged. There is a new deal, and a new retail partner, every single day.

According to Nason, Rodeo Drive’s scenario isn’t uncommon — which is why 96 percent of businesses who run a deal through Groupon would do so again. To further entice retailers to sign up, Groupon doesn’t charge a fee up front, opting instead to take a cut (usually around 50 percent) of the deal’s profit after it is sold.

“We don’t take a dime from the businesses. The only way we make money is by selling these Groupons,” Nason says. “We’re only successful when they are.”

Since its inception in 2008, Groupon has used its collective buying and social media tactics to grow its subscriber base exponentially from 2 million in 2009 to 50 million in 2010, spanning 40 different countries.

So far, according to Nason, the only businesses in the powersports industry to take advantage of Groupon’s program are those offering motorcycle rentals, and motorcycle safety schools offering discounts and training courses. Dealerships can jump on the Groupon bandwagon by offering service department Groupons ($10 for an oil change, anyone?), or even mimicking Rodeo Drive’s deal. “The idea is just to get people off the couch, and to come out and spend,” Nason says. “But even if the subscribers don’t buy your deal, your name and information is still in their inbox, for free.”