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Groupon: Is A Deal Really A Deal?

|Includes:Groupon, Inc. (GRPN)

A friend of mine recently purchased a $40 for $20 restaurant deal on Groupon. Great, I thought. Half price is usually considered a deal. After eating at the restaurant, however, my friend and I realized a significant flaw in our reasoning.

First, we had to pay tax, which is 10% in our area. Second, we had to tip the waiter; 20% is standard where we live. Third, the Groupon did not actually equal $40 worth of food, because we only ate $36 and nothing on the menu was within the remaining $4 range.

We broke down the cost as follows.

Cash paid for Groupon: $20

Tip on $36: $3.6

Tip to Waiter: $7

Total Cash Out Flow: $30.6

Total Benefit from Meal: $36

So essentially we paid $30.6 for $36, or around a 15% discount. Not a very good deal in my opinion, especially when it's marketed as a half priced item.

I see a lot of offerings on Groupon for service related deals, restaurants, salons, etc, where tip is often a large percent of the bill.

If consumers wise up and realize they are not getting much of a bargain, will they stray from their local hair dresser or drive out of their way to experience another restaurant? Will the main people who use the Groupon become the locals who frequent the particular place regardless of any deal? If so this would negate offering a Groupon to attract new customers. What's in store for Groupon if this happens?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: GRPN