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How does Groupon work?

By: Dave Roos

Buying and Redeeming Groupons

Our adventure begins when local consumer Bob visits Groupon.com and signs up to receive daily e-mails featuring deals in his city. One morning he opens his Groupon e-mail to find a deal for $20 worth of food from Eatsa Pizza for only $10. Bob loves pizza, but hasn't tried this place across town, so he clicks "Buy" and enters his credit card information. The first big difference between a normal coupon and a Groupon is that Bob pays the discounted price up front, even before he's in the restaurant. The $10 is split between Eatsa Pizza and Groupon itself, which usually involves both companies taking 50 percent [source: NPR].

The second big difference between a coupon and a Groupon is that Bob will only get the deal if 20 other people click the "Buy" button. This is the "group" element of Groupon. By setting a minimum number of purchases, Eatsa Pizza is guaranteed a minimum dollar amount of sales, or else the deal is off. In this case, Eatsa Pizza wants to make sure it gets at least $100 in sales (20 people x $10 - 50 percent) if it's going to offer such a steep discount. To help reach the minimum, Groupon encourages Bob to share the deal with friends on social networks like Facebook and Twitter. Lucky for Bob, the deal "tips" in a matter of minutes, meaning the deal is on.

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Every Groupon deal has two expiration dates. The first expiration date restricts how long the deal is available for purchase. Deals remain "live" on the Groupon Web site for a limited number of days (the Groupon Web site provides a countdown clock). Once the deal is purchased, there is a second deadline by which the deal must be redeemed. After that date, an unredeemed Groupon is just a useless piece of paper (or barcode).

To redeem the Groupon, Bob either prints out a Groupon redemption code from his e-mail or uses the Groupon app to upload the barcode to the screen of his smartphone. At this point, the Groupon is just like a regular coupon. Bob orders a large pizza and a drink for a total of $22. With the Groupon, he only has to pay $12 (the $10 Groupon plus $2 over the $20 deal). Groupon etiquette dictates that Bob should tip for the full amount of the bill, not the discounted price, but that's only a suggestion.

Next, we'll look at a few different types of deals that are typically offered through Groupon and other daily deal sites.