Groupon for merchants -The profit equation.

For retailer the daily social deals should be structured a bit different. Unlike services retailers do not offer something that give them economic power, they are part of a perfect competition or a monopolistic competition market, they don't normally make more than 30% on each sale, so offering 50% off the and give half of that is not a good idea. However, there is something they could do to gain from the social deals, if they offer promotions like buy 80 worth of product for only 50 they can get something interesting. We assume the daily deal website would get 50% from the merchant, the merchant will keep the money from the unused coupons (lets say 70% of users redeem their coupons), users can only use 1 coupon per sale and merchants get 30% profit, then we have the following equation for profit when a $50 sale occurs on their store and it has to give 80 worth of products: (1-R)(C)+(R(C*P-C*G-(T-C)) Where R is the redeem rate, C is the cost of the coupon, T is the amount of money the coupon gives, G is the percentage given to the daily deal website and P is your total benefit. In the example above we have: .30(50)+.70(50*.30-50*.5-(80-50)) = -13 On average this merchant is gong to lose $13 on this Groupon deal. However, this model only assumes that all users will get exactly $80, this is not entirely true, we assume that all users will get more than $80. Then we can find the minimum average transaction value for the merchant to break even: .30(50)+.70((S-80)*.3+50*.30-50*.5-(80-50))=0 S=142 In other words If every sale is greater than 80, the redemption rate is 70%, the profit is 30% and what the daily deals website gets is 50% then if the average order value is $142 dollars then the retailer will have no profit of loses in this daily deal. This also does not take in consideration the new users that will buy from this merchant again thanks to the deal. Now assuming a retention rate of 5%, and this 5% will purchase one more time at the $80 price, then we will have the following (assuming interest rates are 0 :p) .30(50)+.70((S-80)*.3+50*.30-50*.5-(80-50)) +.5(80*30) Now in order to brake even S has to be 130 dollars. Boomer! we have the equation that gives merchants profitability in a coupon deal! (1-R)(C)+(R((S-T) C*P-C*G-(T-C))+RE(N*P) Where RE is the percentage of new clients and N is the the amount of revenue the average user will bring. NIce! @jordangk