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For starting a deals website, I would like to start by knowing how the deals websites operate( Example: Groupon.com ) in terms of profits. Let me put it in a clear way.

I noticed this. I went to the website, looked at a deal. It costed about $100 but was offered at $65. That means a discount of 35%. That's nice. Now when I tried to buy this deal via PayPal, on the whole transaction they did not charge me anything extra. So I pay $65 and I get to save $35 on the deal. Ok so far.

But here's the real deal ( & my question ). When I pay via PayPal, the business owners are going to be charged at least 2.9% + $0.30 ( = $2.185 ) as transaction fees. So the business has incurred a fees of $2.185 on my single transaction. Which means 100 such deals could cost them $218.5 out of pocket!!!! And I haven't counted all the deals that they might have listed on the website. This amount could easily run into thousands of dollars each day.

So my main question is:

1. How are these websites covering these fees? How can they offer the service for free, when they themselves are being charged transaction fees by PayPal?

2. How do they find partners to run the deals on their website? I mean, when they just started website, no one knew them and wouldn't place deals on their website. So how can companies like Groupon find affiliates or partners to run the deals on the website and convince them to pay the PayPal fees in return for advertising their deals?

I want to know this because I cant afford to pay the fees out of my pocket. If Groupon pays it out of pocket for traffic, good for them. I cant copy them.

Please advice. Thank you.

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2 Answers

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1) They negotiate with Paypal on volume pricing, and then factor it into the price they charge the users, making it "appear" to be free.

2) In the case of Groupon, with a massive sales team - rumoured to be in excess of 2000 people worldwide.

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Thanks for the reply Nick. So if I understand it correctly, the $65 that I paid, included the fees as well? So this means that they are offering the product at a greater price than is supposed to be sold as per the business owner. Do businesses agree to that? And lastly, what does the Groupon team of 2000+ people do actually? – Devner Feb 23 '12 at 0:38
The $65 that you paid included all of the things that Groupon needs to charge in order to run a profitable business. That includes the Paypal fees, as well as something towards their operating expense and of course, their profit line. The Groupon sales team does exactly what you might expect - sell Groupon services to businesses. – Nick Stevens Feb 23 '12 at 1:14
Thanks for the clarification. – Devner Feb 23 '12 at 11:00
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1) Groupon takes about 50% from the vendors, on in your example it's $32.5? So it covers 'PayPal fees' (although I'm sure Groupon does not have these rates).

2) A LOT of money, a LOT of sales reps, a LOT of advertisement.

And, yeah. You can't copy Groupon.

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Thanks for the info. – Devner Feb 23 '12 at 11:00

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