Groupon: The New Coupon Craze

September 25, 2010

By Terry Smiljanich:

Looking for a bargain, but tired of all those paper coupons in your desk that expire before you remember to use them? Looking for fine wines at half price rather than just 50 cents off a tube of toothpaste? Welcome to Groupon, one of the fastest growing internet fads of the past few years.

Groupon, an internet group coupon site, is less than two years old and has already grown to become the latest dot.com fad, with $350 million in revenues, making its founder and CEO Andrew Mason a 29 year old multimillionaire. In fact, recent estimates of the company’s value range as high as $1.2 billion. With more than a million members, and people signing up every day, what has made Groupon so popular? Is it a great way to great deals, or is it just another trendy gimmick to suck dollars out of well intended shoppers who never end up using the coupon dollars they set a side?

How Groupon Works

Group coupons offer people discounts if they sign up for the deal in large numbers. Although other “group coupons” are offered at other places, Groupon is unique in its approach. In over 150 cities across the United States and Canada, members are offered one new deal every day in their community. If you sign up, these deals, for anything from 50% off at a local upper scale restaurant to a major discount at a fine wines store, show up in your email. If you choose to participate, the money is deducted from your registered credit or debit card, and a coupon is made available to you, for use at the merchant’s store for up to one year. A running tab is kept of your purchases on line, so you can see what deals you’ve purchased at any time.

A minimum number of people have to sign up for the group discount before it becomes effective. Should not enough people sign up, your money is refunded. A happy customer we’ve talked to, however, tells us that he has never had an instance where an insufficient number of people signed up.

In return, the featured merchant of the day obtains free advertising and access to a large group of people spending money at its establishment, justifying the large discounts being offered, and perhaps resulting in many return customers for the future. Groupon gets a percentage of the deal from the merchant.

What’s Offered on Groupon?

The variety of services and products made available for group discounts on a daily basis is phenomenal. Massages, stays at resorts, fine wines, boat rentals, portrait sittings, Gap purchases, and gourmet food shops are just some of the deals being offered. One company in the District of Columbia offered “teeth whitening” (normally a $600 procedure there) for only $185.  Each offer is for deep discounts, ranging from 40% to 90% off the normal price.

The founder, Andrew Mason, describes the company’s philosophy this way: “Part of the fun of this business is sending a deal that is for something you normally don’t do, like getting a deal to go to an indoor rock-climbing facility or experience a sensory-deprivation tank, and suddenly that person is saying, ‘Well, if I’m ever going to do this now, this is the time,’ and then maybe that person becomes an avid rock climber as a result.”

One customer told CWN that her daughter discovered that a mountain resort in Oregon was offering a Groupon rate of $122 per night for a large room with a fireplace and overlooking the golf course and Oregon mountains, a perfect location for the daughter’s upcoming wedding. In addition, the offer included a coupon for $40 off food and beverages at the resort.

Groupon’s Success Story

For a start up company already to be earning $350 million in revenues, something must be driving such a success. Andrew Mason points to the recession as a major factor. “I think one of the reasons for our success is that people got used to certain luxuries during better economic times. What Groupon does is allow people to do those things.”

Fast growth and quick revenues has attracted even more investment dollars. In April, 2010, Digital Sky Technologies (DST), a global investment firm located in Russia (which also has invested in Facebook), pumped an additional $135 million into the company, with new plans to expand Groupon’s availability worldwide.

Is it Safe?

Because your purchases are paid for as soon as you sign up for the offer, by deductions from your registered debit or credit card, concern for the financial safety of your information must be a concern. Groupon participates in the “TRUSTe” site validation service, an entity that certifies “trustworthy web sites” that protect customers’ privacy rights. eBay, Microsoft and Cisco, among other major sites, also carry the TRUSTe certification, and CWN has heard of no complaints from customers about the safety of the web site.

Because the Groupon offers are being made to many people at the same time, there is always a concern that the local participating business might not be able to handle the volume of new business. CWN has learned that one such offer, a $50 coupon at Gap clothing stores for only $25, was so popular that the Groupon site itself temporarily went down due to huge traffic. We have not, however, heard of any complaints that stores were not able to meet the demands of customers signing up for their deals.

In an August, 2010, article at the AOL Small business site, Andrew Mason stated: “Ninety-seven percent of the businesses featured on Groupon want to be featured again, and we don’t have too tough a time signing up businesses. In fact, I looked at our number this week — we have nearly 7,000 businesses, spread out over 150 cities, lined up to be featured in the queue.”

Complaints

Groupon is not without its critics. In March, a Chicago law firm filed a class action complaint, alleging that the company violates Illinois consumer protection laws by selling gift certificates that expire in fewer than five years. Groupon denies that it violates this law, and counters that the company has a “no-questions-asked” refund policy so that anyone dissatisfied with his or her transaction can always get a full refund.

A few people have pointed out that because of the deep discounts, combined with the cut taken by Groupon, the merchant often is receiving as little as 25% of its normal price for the product or service, raising concerns, for example, that the $20 massage you may get might actually not be as good as the full price massage under normal circumstances. A check of online comments by consumers, however, reveals that the vast majority of people using Groupon report a favorable experience with the company.

Coupon Redemption Rates

There is one potential downside to the use of coupons by consumers. In 2009, business nationwide issued 367 billion coupons, of which only 3.3 billion were redeemed by consumers. That’s a redemption rate of slightly under 1%. The average value of those coupons was, however, only $1.44.

Since Groupon purchases are immediately deducted from your account, failure to redeem the coupon would obviously result in loss of your purchase money. Groupon deals are, however, for sums substantial enough ($20 or more on average) which will arguably reduce the possibility that you would fail to use your coupon. Also, a track is kept of all your purchases so you can easily see what deals you have purchased but not yet redeemed.

Even with these factors, however, it is likely that some purchased Groupon discounts might never be redeemed. For this reason, extra precaution should be taken by consumers to spend wisely. Remember, as soon as you obtain the Groupon coupon, your money has already been deducted from your account. So if you really want that massage, or truly want to take up rock climbing, Groupon may be a way to save you money. It might also, however, be another drain on your budget if “your eyes are bigger than your stomach” (as my mother used to tell me in buffet lines).