How group buying websites make money

Group buying websites are a relative newcomer to the Internet world, but are becoming increasingly popular. Sites such as groupon.com give their users access to incredibly good offers, usually in their area, as long as a minimum number of people take advantage of that offer. For example, an offer could include an extremely discounted dinner on a good restaurant on a specific date, as long as at least 20 people actually use the discount. Otherwise, everybody pays the full price. It's easy to see how those website subscribers can save themselves a lot of money, but how do group buying websites make money and still manage to offer such large discounts?
Generally, the way group buying websites make money is similar to traditional affiliates networks. They send people to a specific shop or service, and they get paid when those people make a purchase. The difference is that since their offers only work if a large amount of people sign up for them, they are a guaranteed way of sending high numbers of customers to the business in question. And that means they can negotiate extremely good terms, both for discounts and for the affiliate commission they receive. The business is willing to offer discounted prices and a commission in exchange for a guaranteed number of sales or no cost at all, and at the very least they know their name has been put in front of thousands of potential new customers even if the deal fails.

Let's consider, for example, a restaurant offering a 2x1 meal worth 20USD using a group buying website. The restaurant won't offer this discount unless at least 500 people sign up for the offer, and will give a 10% affiliate commission to the group buying website. This means that the restaurant will make a minimum of 500*20 out of each, and the group buying website will get at least 1000. Since the group buying website has thousands of users and each one of the is encouraged to invite their friends and family to make sure the minimum is reached it's very easy that the final number of people buying the offer is much higher than the minimum. If the offer fizzles and nobody buys it, then the users won't get charged and the group buying website won't make money off it, but that is pretty unlikely for any of the major sites. If the offer works out and people sign up, those people are charged in advance and they are given coupons to redeem at the chosen business, which means even if they don't show up the business has a guaranteed number of clients. It's a win win situation, and many business are willing to pay a good share of their profits for it.
Group buying websites make money by being a different way of advertisement. In many cases, there's a limited number of deals per day, which ads to the urgency and encourages people not only to sign up for them, but also to refer them to other people who may be interested, and since they are usually geographically targeted offers the chances of the campaign being successful are much higher than with traditional advertising. Due to the sheer amount of visibility and guaranteed sales they can offer, they can negotiate better rates for their subscribers and for themselves and make a profit off it.

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