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Inside Groupon's HUGE Margins

No wonder Google's interested in Groupon — its margins are HUGE.

How huge?

Groupon
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Groupon

I've just confirmed that Groupon takes, on average, HALF of all the dollars spent on Groupon coupons on its site. That's right, Groupon's margins on each deal are 50% of what consumers pay. Instead of taking a percentage transaction fee for connecting consumers and merchants, it takes a whopping half.

No wonder Google's interested in buying the company.

What's more, Groupon holds on to the merchant's cut of the transaction for some period of time.

In the US Groupon splits up its payments into thirds.

It pays merchants the first third of their cut within days after a credit card transaction goes through. The second third comes thirty days later and the final third sixty days after the first transaction. And overseas, where Groupon's been growing fast and acquiring similar companies, Groupon holds on to the merchant's cut longer — in many cases until after customers redeem their coupon.

Groupon deals are usually 50 percent off, so that means merchants get paid just a quarter the face value of the coupon. (If you buy a $100 Groupon for $200 worth of spa treatments or food and wine at a restaurant, the merchant gets just $50).

So why would merchants use Groupon if they're likely giving away their products and services at a loss? Simple: customer acquisition.

The Groupon model benefits merchants in three key ways: 1)When you get someone inside the door, they're likely to spend more than the Groupon value. 2)People bring their friends. And 3) first time customers are likely to become repeat customers.

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Until now it's been very hard for small businesses — the category Groupon targets — to reach new consumers. They can use Google search ads and they can buy spots on local TV or space in magazines and newspapers. But customer acquisition for small businesses is tough, and Groupon fills a key void. With merchants clamoring to participate — many times the number that Groupon actually accepts — it's clearly worth giving Groupon half the revenue.

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