Groupon has been experiencing some major criticism from burned business owners recently, but is running a Groupon bad for all parties in the business? Consider a masseuse who works at a spa that recently ran a Groupon for 50% off massages.

Where he works, a ritzy spa in an expensive part of town, massages go for $85/hour. If a customer pays full price, the masseuse gets $35 per massage, leaving $55 for the owner. When a customer pays $40 for a massage (the going rate for Groupons), the masseuse gets $25. Theoretically, his tip will not be affected since Groupon users are advised to tip on the full amount of the massage. When I asked about whether Groupon users tipped better or worse than general customers, he said it was generally the same.

The spa is packed all the time, since the owner is constantly offering Groupons, Travelzoo vouchers, Yelp deals, you name it. In fact, one would be crazy to pay full price for a massage at this spa; a cursory Google search shows at least three 50% off coupons available. Just how busy are they? It took me 4 months to make an appointment to use my Groupon.

My masseuse was a massage machine; he prided himself on the ability to do 10 hour long massages in a row with no rest (he liked to be busy to make the day pass, but also make money to fund an outside venture). At the spa, they had four massage rooms which were always booked straight for ten hours a day that the spa was open. In looking at the economics, I’m going to assume the spa negotiated a 30% cut to Groupon (this is fairly standard if you look at Groupon’s S-1)

 

 

 

The spa gets killed by running a Groupon (in the short term at least). On each massage, they receive $40, $25 of which goes to the masseuse, and 30% or $12 goes to Groupon. That leaves them with 40-25-12=$3 per massage. Ouch.

However,  the masseuse actually benefits from a full day of Groupon customers vs just half a day of regular clients. Looking at this math, it really makes you wonder: Why would a spa run such a deal, especially frequently? Here are some plausible  explanations:

1) Customer acquisition- This is the horn Groupon has been tooting since the very beginning. The spa is able to attract new customers who will spend plenty of money over the long term. Their customer lifetime value makes us for a high acquisition cost. More on customer acquisition.

This particular spa had a follow up deal for Groupon users: purchase 2 services for $85 (another 50% off deal) on the spot. In this scenario, the spa keeps $35 (it has to pay masseuses $25 for 2 separate times).

2) Advertising- By running a Groupon, the spa gets brand exposure to hundreds of thousands of people in their potential market. More on advertising.

3) Low Redemption Rate- As I mentioned, it was really tough to get an appointment at this spa. Redemption rates for Groupons are reported to be anywhere from 60-90%. In this merchant’s case, the number of unredeemed Groupons may be a big help to subsidize the effect of used Groupons.

According to this awesome calculator, using the criteria above (basically what the masseuse told me) the spa will lose money from running such a Groupon. However, the masseuse (and other service providers who follow a similar model) benefit greatly.

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