Now that Groupon appears poised to conduct a $1 billion initial public offering that will value the company at $20 billion, some have been questioning whether Groupon and other ‘daily deals’ web sites (like Living Social) are actually worthwhile for the businesses that offer the deals.
While consumers only see the great money-saving bargains — for instance, $40 worth of food at a local restaurant for $20 — merchants have to accept that running a Groupon-type deal is probably going to be a money-losing proposition in the short term. Since Groupon typically gives merchants 50 percent of its deal revenue, that means that Joe’s Restaurant is only receiving $10 for giving away $40 worth of food. Low-margin businesses like restaurants will often lose money on that — and the losses will add up, since Groupon can sell hundreds or even thousands of coupons at a time.
The silver lining for businesses that use Groupon — and the entire premise of ‘daily deals’ in general — is customer acquisition. The idea is that by getting a whole bunch of people to try your food (if you’re a restaurant) or services (if you’re, say, a yoga instructor) you can get a certain percentage of those deal purchasers to come back later and pay full price.
Very generally, businesses need about 10 percent to return to turn a money-losing deal into a money-making deal. But does that actually happen? The question is especially pertinent in Arlington, where lots of businesses have been trying out daily deals and where customers can simply jump from deal to deal, if they really wanted to.
If you’ve ever bought a daily deal (for a business you were not already patronizing) have you at some point returned to that business and paid full price?