"I'd be very interested in a stat of how many of Groupon's merchants are operating these deals at a profit."

Isn't the point that it brings customers in the door albeit at a loss? Hopefully, the future value of the customer is more than the loss on the initial deal. I think that's what your getting at with your subsequent sentences. I am not in the retail business so this is just conjecture but it seems to me that it's almost impossible to operate one of these deals at a profit. Basically, you are renting Groupon's sales machine and hopefully you convert a big percentage of the customers the deal brings in. I would also guess few retailers have the ability to present value the customers future revenue correctly and I'm sure Groupon will (if they haven't already) offer tools to measure that and justify the ROI of their deals.

Yeah -- it's a really bad setup in the end though because Groupon attracts the type of customer that isn't likely to spend a lot of money in the first place unless there is a deal. In other words, Groupon can attract a lot of customers, but the quality of those customers isn't very good (at least from my personal experience, all of the people I know who heavily use Groupon don't really use it at places they haven't already heard of before). The ROI must be terrible, but it also can be difficult to measure.

I think it depends on the kind of business. I think it is useful to break Groupon deals into a few categories, as well as the number of customers involved in any given deal:

FAST-FOOD DINING Depending on the number of customers. most, if not all, fast-food restaurants will probably be able to make a profit of a 50% deal. These businesses thrive on large numbers of customers, and their profits scale extremely well. It is also relatively easy to win over new customers if you are more convenient, providing a reasonable opportunity to gain repeat customers (ex: Dominos does a deal and people find it delicious and cheap).

SIT-DOWN DINING This is a much harder category to map a profit on a Groupon deal. These restaurants have a much more rigid number of customers they can serve on any given night. For a popular restaurant there is to use Groupon as they can already fill the seats and it is not a good value for them. For unpopular restaurants, people will attend but it seems unlikely these will be repeat customers. They are already bargain hunters, and it will be hard to wow these customers enough to return to your restaurant repeatedly.

ONE TIME USE ACTIVITIES These deals have a similar problem to the sit-down restaurant. These are fun the first time, but repeat visits are much less compelling and it will be challenging to permanently pique the interest of bargain hunters. (ex: Deal on a boat tour)

REPEAT USE ACTIVITIES Repeat activities seem like a reasonable set market for Groupon. These activities suffer from the same fixed-sized problem, however they stand a reasonable chance of retaining customers. Deals such as training and introductory courses are explicitly designed to attract new customers, and a Groupon top get them in the door seems fairly reasonable.

No matter what activity the Groupon is for, the number of customers who take advantage of the deal is a key component. Economy of scale is true for every business, and the more customers who take advantage of any given deal will directly affect the profit in involved with any given transaction

I think a lot of it is profitable for merchants these days. Invariably when I peek at Groupon, the deal falls into the category of "useless shit that is insanely overpriced normally, and with the deal is just reasonably priced useless shit".

I'm an investor at the TechShop in the Raleigh-Durham area. We ran two Groupon deals over the past 9 months. Both had very good results (~280 sales each, at $120/Groupon. Groupon took ~20%). We were VERY careful to structure our deal such that we would make a profit on each deal - membership is fairly cheap per customer. Our main cost is instructor time for classes, and we have a minimum number of people/class. Furthermore, the business is such that getting a potential customer to visit the TechShop is very valuable (the TechShop has a certain wow factor), so we were counting on the discount given via Groupon as the cost of getting someone to visit and try the shop.

So far, the results have been mixed, with about 20% of the Groupon users signing up for additional months of shop access. That's better than the other steep discounted deals we've offered.

So, for a business like TechShop, Groupon works really well. We'll be working with them again.

If you're a Groupon shopper, wouldn't the novelty, of say, going to that same spa wear off the second and third time you saw the deal? Similarly, if you keep selling your services on Groupon, don't you cheapen your brand. To me, there's not much incentive for repeat customers.

More and more I see deals that are likely to be turning a nice profit. For instance, last month there was an acting seminar in LA -- only a single 5-day session was offered which all Groupon buyers would attend. ~300 people signed up at $100 per head, for around $30000 revenue.