So what exactly is Groupon?

Groupon is a "deal-of-the-day" company which sells coupons and gift certificates that are redeemable at local and regional businesses. Each day, Groupon offers a new deal for each specific locale, such as Chicago, New York, Los Angeles, etc. However, the deal is only valid unless a certain number of people purchase the coupon. This creates a "win-win" situation: the consumers benefit by getting discounts on local products and services, and the stores offering the coupons receive enough customers to make it worth their while. Groupon typically offers deals related to dining, concerts, museums, all manner of tickets, and more.

Based in Chicago, Groupon was founded by Andrew Mason and has been operating since 2008. In December 2010, Groupon turned down Google's bid to purchase the company for $6 billion.

How Does Groupon Make Money?

Groupon makes money by selling coupons and gift certificates for local businesses. The revenue they make is split with the business which offers the deal. The easiest way to understand how Groupon makes money is through an example.

Suppose Groupon sells 100 coupons to a coffee shop in your town. The coffee shop and Groupon have determined that at least 50 of the coupons must be sold in order for the coupons to be redeemable. Assume that all 100 coupons sell and the deal is on. The coupons are for $5.00 off a popular type of coffee drink, which normally sells for $10.00. So who pays what, and who gets what?

You pay $5.00 for the coupon, go down to the coffee shop, and redeem it for a tasty coffee.
Groupon and the coffee shop split the $5.00, each taking $2.50.

These numbers are pure estimates and used only as an example. But why would the coffee shop essentially want to pay Groupon just for the right to sell their drinks for less than they are worth?

The answer is customers. This is why a certain number of coupons must be sold each day for the deal to be valid. The value for the coffee shop is getting lots of customers in the door, many of whom will likely return at some point and buy drinks at full price. But unless a certain number of customers buy the coupons, it is not worth it for the coffee shop. In a way, it's almost like advertising. Groupon just facilitates it....very well.

How Much Money Does Groupon Make?

Groupon has been valued at approximately $6.4 billion. The company's monthly revenues in January 2011 were $89 million, up from $11 million in January 2010. On June 2, 2011, Groupon filed to go public and will trade under stock symbol GRPN.

Both Yahoo! and Google have made past bids to acquire the company, both of which were turned down. Yahoo was believed to have offered $3 billion in October of 2010, whereas Google reportedly offered a package worth $6 billion for the company in December 2010. It was reported in January 2011 that Google had plans to start its own deal-of-the-day site, called Google Offers. The site is currently in beta testing.

Groupon Competitors

Founded in 2007, Living Social is Groupon's primary competitor. Like Groupon, they are a "deal-of-the-day" company, offering daily discounts in more than 240 locations. Living Social is headquartered in Washington, DC.

As of 2011, Living Social is valued at approximately $3 billion. The company reportedly earns nearly $1 million a day, and is expected to exceed $500 million in revenue for the whole of 2011. Living Social currently boasts more than 40 million members.