Why Groupon is Poised for A Collapse

This is a VERY interesting article. At first I was skeptical of Groupon, then I loved the idea and have gotten a lot of deals from it. But looking at it from a business perspective I can totally agree with the author of the article. Especially the part about running repeat deals and "Revenue from subsequent daily deals help pay for the obligations created by the first one."
Thanks for sharing and it will be interesting to see how these deal sites progress over the next few years.

Groupon and other coupon carriers are GREAT for the consumer, and not so great for the business. I have talked to a ton of restaurants that used it, and they said "Never Again"......and they do know the value of a customer!

That was a stellar article. I've been against Groupon from the start (until recently my wife and I owned a wine & cheese shop) because of the lop-sided economics of the deals. The woman who bought our shop bought in to the Groupon madness, and is now trying to save what is left of her ass!

Of course, Amazon.com was "poised for a collapse" soon after they gained prominence. I was once told by a very knowledgeable financial planner that in order for Amazon to survive, they would have to have 100% of worldwide book sales, and even that might not save them. We all know that Amazon survived, but they did so because they changed their business model.

That's what Groupon will have to do in order to survive. And while I was pulling for Amazon, I actually hope Groupon bites the dust.

Why?

Because Amazon has always been about providing a great experience for everyone, while Groupon is less about providing a great experience for the consumer and more about cashing in. That's not even considering the damage Groupon has done to a lot of businesses out there.

Will

Most small businesses have no idea what hooking up with Groupon can do to their business (not in a good way). Here's a great book on the subject:

Amazon.com: Groupon: You Can't Afford It--Why... (Not an affiliate link)

This should be a must-read for anyone looking to establish themselves as a trusted partner with offline businesses.

One of the long-term side effects of using a Groupon-style promotion is that a business SERIOUSLY devalues their product/service when they use it. For example, this thread:

http://www.warriorforum.com/offline-...onsultant.html

"$40 for Four Weeks of Boot Camp ($197 Value)"

Well, it sure isn't a $197 value any longer. It's now instantly become a $40 value. The company in question sold $180,000 worth of classes (905 x $197) for $36,000 (905 x $40) of which Groupon took 50% (plus credit card fees) leaving the trainer $18,000. He paid the consultant $9,000, leaving the business owner $9,000.

In the end, the business made $9,000 on 905 sales, or less than $10 per person, or $2.49 per week, per client versus $49.25 per customer, per week (the stated original value as stated in the offer). In other words, the business took in 5% of the value they originally claimed their product is worth.

Five percent.

If you're going to give your business away with a daily deal promotion, especially with a company that won't give YOUR business the contact information of YOUR customers they sold YOUR product to (Groupon made $18,000 without delivering a single hour of training -- the business owner made half that and had to provide all of the actual classes) then you had BETTER be ready to milk that promotion for all the recurring revenue you can.

I noticed an interesting comment at the linked article that was cited above...

"Groupon is simply like those stores with the sign "GOING OUT OF BUSINESS! EVERYTHING MUST GO! 70% OFF!"

"Then you walk in and realize that maybe 1-2 items are worth it, everything else was marked up and there are things wrong with the business."

I think there's a lot of truth in that.
_____
Bruce

Yeah, I've gone against the grain too not being a fan of Groupon for business owners, and consistently have advised customers against it. Like the analogy of the "going out of business."

Yes, there are many business owners who are little more than flea market booth operators who've not understood the program.

And it's no secret that Tech Crunch hates Groupon.

I have done several hundred Groupon deals with business clients in many sectors. All of them have performed extremely well.

First of all, trying to make money on the Groupon deal itself is simply idiotic. That's not the point at all. Never was the point.

They are one of the largest localized EMAIL marketing companies with gigantic databases for each market they're in. You're buying EXPOSURE in the form of a loss leader deal.

And what makes it work is this... instead of writing a check to the local radio station, newspaper, Val-Pak, et al... for the entire amount of the ad campaign on the front end... Groupon permits a business owner to AMORTIZE THE MARKETING COST OUT OF OPERATIONS.


So in essence, THAT MAKES GROUPON THE BANK... holding the paper for the finance cost of a giant local marketing email campaign that would have otherwise cost the business owner thousands of dollars out of pocket on the front end.

You actually get paid some money on the front end... and you don't really have to incur the cost on your own books until the voucher is actually redeemed. This means for businesses that are operating at less than peak capacity (most of them), they can leverage the fixed overhead costs (things you're paying for regardless if a customer is there or not... labor... rent... utilities...) to introduce new customers to your business. You have the option of paying those costs without any new business... or you can cover the very basic variable costs of your service or product with the sales of the actual deal, get the cash on the front-end, and then absorb the "loss" into operations across a period of time.

The alternative is, of course, to just take a big chunk of money out of your cash flow, pay for an ad campaign with no performance basis attached to it, and pray for the best.

But somehow or another that is supposed to be a better option?

Listen, it's certainly not for every business.

And unless you've really got a good back-end strategy to capitalize on the new influx of business (repeat business deal to train a return visit customer), then maybe you're not really a fit for the Groupon model.

But let's be clear... the system works extremely well for those who understand how to make it work.

One of my clients did $35K in laser vein treatment. They had plenty of scheduling capacity and it didn't affect the top line paying customers at all. They essentially broke even on the front-end deal, and then went on to create $130K of new annualized business - BECAUSE THEY UNDERSTAND THEIR LIFETIME VALUE OF CUSTOMER.

The other thing is... smart business people understand that even Groupon deals are NEGOTIABLE. I've done deals with Groupon taking 30% of the voucher sale.

So before we run down the road singing Tech Crunch's hatemail gospel song, let's consider the source, and also consider the bigger business picture.

Interesting.
We have been in a meeting with a client today who has done very very well from Groupon, only a small local hair salon in sheffield but has done very well from it, his main issue is many people called to book appointments and never turned up.

Were working on a system for him to take payments and bookings with a coupon code so hopefully this will cut out the none shows.

I have tried to tell people for like a year that Groupon is a BAD IDEA for small businesses. They have to give up too much of their margin in order to get customers, and any small brick-and-mortar business owner will tell you - they operate off very SLIM margins.. especially with restuarants could be margins less than 5%

I'm really, really hoping a lot of the people posting in this thread do not handle their client's marketing efforts because the vast majority of you simply do not understand Groupon and the intricacies of making it work.

They should have taken the $6 billion from Google

As an offline e-strategy consultant, THIS is what you need to protect your clients against:

Wow, very enlightening read. I had no idea Groupon's business model was so jacked up. I thought it was genius at first glance but clearly there are some huge potential problems for both Groupon and their clients.

Feedback from business owners is overwhelmingly negative, but I can see the concept making it in the long run.

The half off concept needs to end (just causes price inflation pre-coupon) and Groupon needs to take a smaller cut.

Most small business owners are very poor marketers and that's why their Groupon strategy doesn't work.

I had a good friend that owns a studio and she sold over $22K in coupons on Living Social. But here was the problem, they had no system to collect the people's info or efficiently book when they came in to redeem the coupons. They also didn't have a followup system set up.

They made money (very slim margin) but are not sure they want to do it again. Why, because they're not marketers and don't understand that all marketing campaigns must be planned out. If they had followup, scheduling and a referral system in place before they ran this campaign it would have been much, much more profitable.

They sold a lot of coupons. So many that all the other daily deal sites contacted them and were willing to take a lesser percentage on the deal. Had they known the full power of using a pre-planned marketing system, they could have generated huge amounts of new customers.

I agree, they should have sold out to Google for $6 billion while they had the chance.

Michael,

I could not of put it any better! I work for one of the largest daily deal sites and what you said is exactly how present it to my clients. We get businesses who run with us time and time again because the promotion was a success. The thing about it is you have to structure the promotion correctly!!!!!!! when we do a promotion we take alot of factors into account and one of them is average ticket. We also do alot of ground work preparing the business owner prior to running the promotion.

Your right i think tech crunch hates Groupon but guess WHAT! I have no indication of business slowing down for us,matter of fact its getting beter and better.

Thanks

I have to agree that Groupon is probably not right for some businesses, but as everyone has alleviated to...if they don't have a way to capture their information and be able to market to them after they walk out of the door then they are truly throwing their money away.

Groupon works if the business owner puts the right systems in place to capitalize on the additional traffic. I'd say that's where we come in as it is our responsibility to let our clients know what they really need to be doing to benefit.

I have a friend in the beauty services business that used to do initial consultations for free. What she does is now sell them for $30 each on Groupon and other similar sites. She makes her real money from product sales and extra services on the back-end. Brilliant.

I wouldn't recommend Groupon for anybody that sells actual goods or has any fixed overhead though.

This is a better article talking about the same issue. why groupon is poised for collapse

Groupon Shares Fall Announced Today!

Groupon shares tumbled 6% in after-hours trading on the weekend after the group buying pioneer announced yet another accounting error meant its fourth-quarter results were weaker than expected due to more customers demanding refunds.

And in a double-blow for the company, Ernst & Young also included a "statement of material weakness" - a red flag for investors and analysts.

It's the second financial embarrassment for the company, after it amended its original S1 filing last year after accountants took issue with a non-traditional accounting metric that could have overstated its actual earning potential.

Groupon originally said its fourth-quarter loss was $US42.7 million, or eight cents per share, although revenue had nearly tripled to $506.5 million.

But late last week, the company said a higher number of customers asking for refunds prompted a revision. Policy dictates any customer unhappy with their experience is entitled to their money back.

"The revisions are primarily related to an increase to the Company's refund reserve accrual to reflect a shift in the Company's fourth quarter deal mix and higher price point offers, which have higher refund rates," it said in a statement.

Now, Groupon says its loss is actually $US65.3 million, with revenue also reduced by $14.3 million.

However, it said the business had updated the way it handles refunds.

"We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants," chief financial officer Jason Child said in a statement, also saying previous earnings guidance remains unchanged.

First-quarter sales are expected to be between $510-550 million.
However, analysts are more concerned over a statement of "material weakness", with auditor Ernst & Young saying there was a deficiency in the financial statement process.

Groupon says it's been working with another accounting firm to work on the effectiveness of its total controls, and is also working on fixing the problem through new "improvement initiatives" and changes to its staffing.

Morningstar analyst Rick Summer has said the latest situation is "serious".
"It is troubling if you have accounting irregularities out of the gate," Summer said to the Chicago Sun-Times.

"This is a big company with blue-chip investors, blue-chip investment banks, blue-chip accounting firms and what was deemed to be a blue-chip management team."
Analysts were already concerned over Groupon's finances. The company is yet to make a profit, saying marketing expenses come first as it chases aggressive expansion.

Last year, the company caused controversy over a non-traditional accounting metric used in its S1 filing, which was eventually removed, resulting in changes to its financial statement.

Questions have also been raised as to the amount of money the founders have cashed out of the business, while last year, a memo to employees sent by chief executive Andrew Mason was leaked to the media during what was supposed to be a "quiet" period before listing.

The incident reportedly sparked questions from the Securities and Exchange Commission - especially after one executive claimed the company would be "wildly profitable".

shoulda went with google!

Does anyone know how Groupon went about building their list in the beginning?

Groupon's pricing is by far their biggest downfall, if they change that to a respectable amount, owners will be more attracted to using it - plus the initial hype around Groupon has gone by now.

I've never like the Groupon model (from a business owner's perspective). True, it's a fantastic money maker for the deal-of-the-day sites. I've considered several times in creating one in my local area (there is one already...like Groupon, they take 50%).

If I were to start one, I'd only ask for 20-30% and offer a monthly SMS service to market to the lists generated. What are your thoughts on this approach? Would a business owner be more inclined with this offer?

I had a friend that did a groupon here. Poor girl was doing well growing her cleaning service until she did one of those. I don't think it was Groupon, it was one of the other ones. They talked her into doing an insanely low deal where she ended up losing money on them. I think with Groupon, some businesses are legitimate great small businesses and they look at getting paid up front for all these new customers, not realizing most of the people are only deal hunters and only want the low price. Your service suffers because of the influx of all those customers at one. Even though they see how many other people bought them, they fell like they have to come first. They expect way more than what they pay for. They are the main ones who yelp all the time and it will destroy your business reputation online. Groupon and the others could care less because they already got paid off of you.

She's out of business, had to file bankruptcy and had a lot of people angry with her about the deals. She told me even though she did a great job at a lot of the clients, only the bad reviews seemed to make it online. And not one of the people were really looking for a cleaning service. It was just a lot of people with $40 bucks that day that looked around there house and said "I'll pay somebody to clean up this crap for $40!"

I'll tell you something nobody ever discusses that was crap to me too. She said they took 40-50% of each sale. Yeah its great free marketing, you only pay for what you sale, But if you already discounted your services 50%, and then they still come and take another 50% of that, you can't make anything but a headache for yourself.

You know what you're getting up front. It's up to the business to determine how to get those people back in the door and paying the normal rates. If they can't do that, it's not Groupon's fault.

95% of businesses don't know how to market.

A Groupon deal not only DEVALUES your product -- but more specifically, you APPEAL to a DIFFERENT client than what your original price point targeted.

Even worse, you piss off current long-term clients who DON'T get the deal -- plus, with a RUSH of new business you may not necessarily be able to manage, you will anger OLD clients and portray quite possibly the wrong customer experience, as your staff or facility might not be equipped to handle the influx.

I read it once and it makes truly perfect sense: These are Groupon's customers -- not yours, especially if you have no conversion plan to change them from sweaty-palmed discount die-hards to loyal, full-price paying clients.

Groupon has the potential to be a great lead source for small businesses (especially high margin services) if business owners were more educated on up-sells/cross-sells. Marginal net worth of a client/customers and how to implement a back-end campaign, they could easily turn a loss leader into a significant six or even 7 figure profit center, they would almost never have had access to without Groupon.

Maybe that's where folks like me and you come in.

Anytime you have a sale, you should have a specific reason for that sale, letting consumers know why you are having the sale.

I'd also have something the customer had to do or give in return for the great price he is receiving, even if it is a can of peaches or clothes for the homeless.

Just having the customer do something may turn up a better customer as someone who is just looking for a discount might just want to buy the sale and do nothing else. This in turn gives you a more ideal customer as at least he/she will get off their buttocks and do.

Great thread and a real eye opener on Groupon.

The thing I never got about people who do Groupon for their business is why?

Why make 25% on a deal and not all up front?
Why give a 50% discount when you are really giving a 75% discount?

Why not instead do this....
1. Direct mail: For resturants and such you can do the every door thing from the post office very cheaply.
2. Offer a big discount(25% to 50%) on a coupon.

By doing that you get customers who are in areas near you that you targeted. This will include some customers you alreayd have but they will not feel burned because they didn't get the deal.

You can even do this as a rolling deal and target different neighborhoods each month to grow your business. On the mail piece you can include other coupons for multiple visits and offer a nice discount to join your SMS or email or facebook list where you can send deals to your customers to get them in the seats more often.

Basically if you are going to give massive discounts why not control it. Target people beyond "deal hunters". Groupon's list is full of deal hunters. They want to sell them multiple deals. That means that when you use a groupon deal your hopefully repeat business is always being wooed by other groupon deals.

Not to mention that often the demographics of groupon's list doesn't match up with your customer base. let's say based on your menu prices that most of your customers make $50k plus. If groupons customers average $20 to $30k does it make sense that they will come back? Can they even afford your normal service?

When you control your marketing you can target better. Off target marketing that drives in deal hunters isn't good for a lot of businesses. Think outside the box and don't let the sales guy at groupon sell you on a dream of customers. You don't want a lot of customers. You want dependable, profitable raving fans. Groupon will never provide those.

My carpet cleaning business ran a Groupon. it was the worst thing I could have ever done

I would never consider using a Groupon for my business. Too many hit and run customers.