Most retailers and businesses are more than happy to give discounts when people buy in bulk. The difficulty for individuals is getting enough people together to enable this to happen. The internet once again helps to solve this problem with websites like and Gilt.

Like the giant online auction site Ebay, Groupon has solved a real world problem and has created a fantastic new marketing channel for businesses and consumers who benefit from getting huge price reductions to goods and services in their city.

So how does Groupon actually work? Basically, Groupon puts up a daily special or coupon on its website. The offer is usually at least half of the usual retail value of the product or service. People can then "buy" this coupon. The offer however, has to reach critical mass and it won't be valid unless a certain number of people buy the coupon.

This helps businesses know that they will get at least a certain number of people taking up the offer, so they can then calculate exactly how much discount they can offer while still making money themselves on the deal.

Whether businesses make money on that specific deal or not is less important for some businesses. Groupon and sites like it, are helping businesses find new customers. The other advantage is that there is no upfront risk or cost to them. They only pay Groupon a small commission on guaranteed sales.

This makes these kinds of group buying sites much more effective than traditional advertising methods, like printed brochures or advertisements in newspapers and magazines. With traditional forms of advertising there is no guarantee that they will be effective and businesses need to pay all of the costs up front. Imagine a magazine offering businesses advertising where they only pay for actual sales that the promotions bring in! In reality it is only another nail in the coffin for traditional forms of advertising.

The success of Groupon has spawned a large number of similar sites across the globe, including China and Russia. There are even a few coupon scripts available which allow internet entrepreneurs to start their own group buying coupon website. The CEO of Groupon Andrew Mason has even stated in an interview that they won't be going after these clone websites as they are focusing on their own business.

For consumers, anything that offers them savings is a good thing. Part of Groupon's success must be partly attributed to the buying psychology of consumers. Just as most retailers know that they can make more money by offering their goods at a discount by having a sale, Groupon taps into this mindset where people think that they are saving money, whether they even need the goods or service that is being advertised.

All coupons eventually expire and of course there are always going to be people who don't even end up using the coupon that they paid for. There are even Craig's list types of website popping up where people are selling off the coupons they bought but for whatever reason, don't want to use.

Group buying websites like Groupon are certainly a new and interesting marketing channel for businesses. Consumers also benefit from increased savings, but it will take some time before businesses understand if this is just a marketing fad or a sustainable model for businesses.