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The Groupon Business Model

The online business model first executed by Groupon is a lucrative platform for online advertising ventures. To date, more than 500 companies have structured themselves on the Groupon model, and many small businesses stand to benefit from involvement.

The partnership between the host, or Groupon-like, site 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 vouchers, offering a business’s products or services at a significant reduction, often 50% below the usual retail price. The host site then collects its fee by retaining a percentage of the revenue earned from each sale, which is also usually 50% percent. Customers purchase vouchers by visiting the hosting website or following links provided in e-mail 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. The Groupon business model often attracts a younger crowd, one that is invested in social media and can extol the perks of a positive experience with a product or service using a variety of online social outlets. The buzz created among their circles of virtual acquaintances has greater reach than traditional word of mouth, and possibly more influence than more expensive forms of advertising. This youthful contingent is particularly open to new experiences and trends, and is looking to make attachments with worthwhile establishments.

Offering services through a Groupon-type site is appropriate and useful for small or relatively unknown businesses that want to develop name recognition and eventually customer loyalty. A restaurant, for example, is an ideal candidate for a Groupon-type promotion: it’s a business intending to establish a loyal customer base that will return regularly for repeat purchases. While new customers may initially be drawn in by the appeal of low prices, it is contingent on the businesses to retain new clientele and build on the relationship offered by the Groupon-type advertising.

Since the Groupon business model results in businesses generating a fraction of their usual costs for promoted services, monetary benefits may not be immediate and owners should 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 customers come forward. In short, an unsuccessful promotion results in no loss to the promoted business and no gain for the hosting site. Additionally, the vendor can establish a limit regarding how the amount of vouchers available for a specific service and/or the duration during which the promotion is available. Vouchers come with an expiration date and a limit on how many can be purchased and/or used at a time.

Regarding the future of this advertising platform, niche specific websites are showing particular promise. The Groupon business model is an effective advertising method not only for region specific services, but also for products and services targeted at ethnic or cultural denominations.