Growing Customer Bases with Groupon
Groupon was started in 2008 with the idea of having people purchase coupons for steeply discounted goods or services. The coupons would only be valid if enough people—a number that Groupon and each business agreed upon—bought the deal. Groupon’s business model, especially the reason why companies choose to work with Groupon, fits well with the idea of network effects discussed in class.
A product or service featured on Groupon’s website is generally discounted around 50% or more. If a minimum number of coupons are sold, the business gets about half of the amount each customer pays and Groupon receives the other half. Because prices are so discounted, it may be difficult at first to understand why companies participate. In the article accompanying this post, some business owners indeed say that they lost money in transactions involving the coupons sold by Groupon. The primary benefit then is not just more sales—it’s new customers. When people who have never before bought from a company purchase a Groupon, they try the company’s products or services and may become regular customers.
Lowering the price of something also lowers its tipping point. As more customers buy from a business, the tipping point may be exceeded and the amount of people buying will go to the higher equilibrium. Businesses hope many new customers will continue to buy from them once the Groupon deal has ended. For this to happen, the amount of customers must remain above the now higher tipping point that resulted from the higher price.
Groupon does not always work perfectly for smaller businesses. Customers may overwhelm stores if they have not prepared for a rush, or businesses may lose track of who has redeemed a coupon. However, working with Groupon has the potential to greatly increase businesses’ customer bases, so many find the potential negatives worth risking.
http://www.inc.com/guides/201101/how-groupon-works-for-small-businesses.html