Groupon Bets on Merchant Services: A Discussion with Mihir Shah

Groupon founder Andrew Mason’s concept of Groupon as “the operating system for local commerce,” had a certain catch to is, but what does it actually mean in practice?

That’s the challenge being addressed by Groupon’s “Breadcrumb” team in Silicon Valley, which has rolled out a suite of services for restaurants and now, other verticals. Groupon is hoping that the Breadcrumb services represent a new source of revenue that can leverage the client relationship that Groupon has already formed vwith 500,000 merchants worldwide – perhaps 100,000 of those in the U.S.

Built on top of the Breadcrumb processing service acquired by Groupon in June 2012, two types of “Breadcrumb by Groupon”-branded services have been introduced.

The first is a full-featured “Pro” product that launched in October 2012 and includes such features as table management, discounted payment processing, full customer support, etc. Monthly fees for Pro range from $99 to $399, depending on volume and what is included. The second Breadcrumb product, introduced this month, is a free Point of Sales tablet product that will compete with Square and others at the low end.

A major inducement for SMBs to switch to Breadcrumb are highly discounted, perhaps subsidized payment processing rates, which for Groupon merchants, are just 1.8 percent plus 15 cents per transaction on Visa, MasterCard and Discover swiped transactions, or 2.3 percent for keyed-in transactions (plus 15 cents).

These rates compare favorably to other fees. Square, for instance, charges 2.75 percent plus per transaction fees. An added sweetener to switch is free processing for the first $5,000 of transactions – a move that might cost Groupon $150-$300 per merchant.

Groupon is also now selling pre-configured hardware boxes to help SMBs get started, including iPads, printers, routers – although items can also be purchased a la carte.

VP for Merchant OS Mihir Shah tells us that Groupon’s aim is to provide “mission critical” services for a wide range of local Brick & Mortar businesses, although restaurants currently dominate the mix. The Breadcrumb services leverage Groupon’s existing merchant list, and also seek to convert Groupon’s Mobile App users, which now account for 40 percent of all Groupon revenue. For merchants, “it is a way to perfectly manage yield,” says Shah.

Are Groupon relationships with its merchants as bad as the press has made them out to be? Shah maintains that Groupon’s merchant relationships are actually very good, and much more of a client relationship than the casual deal-to-deal relationship that it had when it was based entirely on email promotions.

With the arrival of ongoing mobile services (and social media), Groupon has moved to a “DealBank” relationship enabling merchants to pinpoint how many units they want to push through Groupon’s ongoing deals supermarket, or specific promotions. That keeps them in the Groupon fold, and carefully studying their analytics and marketing, he says.

“The retention rate is very high for deals,” says Shah. “Now we are helping you to run your business, and build your business. Our goal has always been to be a partner of these local businesses.”