The Knewton Blog


Groupon Is a Straight-Up Ponzi Scheme

Posted on June 3, 2011 by

266

I would love to be wrong about this. Especially given the fallout in the tech economy if Groupon blows up. But isn’t it really pretty obvious that Groupon is a massive Ponzi scheme?

Let me first say that Groupon filing to go public is not proof of a tech bubble. There is no tech bubble, just a micro bubble here or there. Nor is the Groupon story even particularly interesting or important compared to what’s happening in Europe right now. But since it has filed for IPO and since all of us in the tech economy now must spend the next years hearing the breathless gossip, IPO hysteria, and requisite recriminations over the inevitable implosion — let us briefly examine the tulip mania that is Groupon.

Why is Groupon not merely a tech-bubble datum but a Ponzi scheme? Simple: Groupon has found that you can get local merchants to try anything once if it brings them new customers. A few local merchants in Chicago get them started, and Groupon shows good revenues. In fact, Groupon immediately remits half of those “revenues” back to the local merchant — they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago’s local merchant community and repeat the trick in other cities.

Meanwhile, many early-adopting merchants find that the burst in customers immediately disappears, and since they can’t perpetually discount 75%, those merchants stop using Groupon. But Groupon’s sales force adds many more new merchants than it loses (for now). And Groupon goes out and raises another round at an even higher valuation; they hire even more salespeople and expand into even more virgin territory. Lather, rinse, repeat.

The model is only sustainable if it pays off for local merchants — and to justify Groupon’s current size, it now must pay off for local merchants ubiquitously and flamboyantly. If not, Groupon is mostly a Ponzi scheme.

Groupon argues that it helps merchants attract new customers who become loyal patrons, and that pays for the expense of winning them via Groupon. This is the fundamental argument Groupon’s sales force uses to close local merchants. Let’s get past the sales speak to what this really means. The typical Groupon “deal” is 50 percent off retail, with half of the proceeds going to Groupon. So the merchant gets 25 percent of the revenue s/he would have received if the same number of customers had arrived via walk-in traffic. Except that all that Groupon revenue is unprofitable — so more and more Groupon revenue is actually bad.

The vast majority of local merchants can’t discount more than 10 percent. Some can go maybe 25 percent in special situations. But 75 percent is a wholly unsustainable number. If all local merchants begin using Groupon then it can’t send loyal customers to anyone; Groupon can only send discount chasers to merchants. Which means that as Groupon grows, both local merchants and their competitors will find that Groupon’s main argument no longer works (if it ever did) — Groupon simply can’t send them loyal new business. So they all stop using Groupon in its current form.

Perhaps Groupon management thinks it is creating a sustainable Prisoner’s Dilemma, one that ultimately destroys value for the local merchant ecosystem but benefits Groupon. In other words, Groupon could grow so big that local merchants have to use it, even though it ultimately hurts them. In game theory terms, Groupon creates an equilibrium point at “All Local Merchants Defect,” and then, having forced merchants into this value-destroying equilibrium, takes a cut for having rigged the game. Obviously, Groupon couldn’t share this thinking publicly. They would just continue to use the attract-loyal-new-customers argument even though it no longer makes any sense for a ginormous Groupon.

This may sound cynical. But if this is Groupon’s game plan, it isn’t cynical. It’s naïve. Most local merchants simply don’t have enough value in their collective ecosystem to share anything remotely like this much value with Groupon. This isn’t a stable equilibrium, it’s a suicidal one. The local merchants will have to stop using Groupon en masse not long after they first start experimenting with it.

Due to its size, Wal-Mart can squeeze its suppliers on price and its suppliers will comply. Lower prices create value for Wal-Mart’s customers. But it’s sustainable only because it also creates value for Wal-Mart’s suppliers who are large enough that they can find efficiencies in their manufacturing processes (generally by outsourcing manufacturing to low-wage economies like China). That’s bad for American workers. But it’s value-creating for Wal-Mart suppliers because they get to sell stuff through Wal-Mart (which means they can sell more of it) at margins that are acceptable due to reduced manufacturing costs.

But most Groupon local merchants are nothing whatsoever like Wal-Mart’s suppliers. They generally have no margin to spare or wiggle room in their operating costs. Therefore, they cannot continue using Groupon.

Let’s consider the exceptions because there are some. A local merchant with huge gross margins — 70 to 90 percent — can use Groupon sustainably (though it still isn’t clear that they should). Or, a large local merchant who does a lot of expensive customer acquisition (i.e., local television) can use Groupon sustainably but only if Groupon is better than its traditional customer acquisition methods (doing both and doubling customer acquisition costs will not double the local market size).

This is why Groupon must ultimately implode — there just aren’t that many business that fit either of these descriptions.

Groupon’s management publically avers that “local merchants come back” — well, sure, some of them do. For a while. But what do the audited numbers look like? Just what percentage of local merchants come back? How many times? Do local merchants show a strong tendency to decline in participation over time?

Groupon management won’t release these numbers, and certainly won’t release thoroughly audited and vetted versions of these numbers. Instead, what Groupon management is doing is withdrawing an astonishing amount of cash out of the company. It’s also creating a new class of B shares so that it can keep control of the company in the hands of management — all the better to keep the Ponzi scheme going for as long as possible.

Again, there isn’t a bubble in tech. High valuations for many of the big tech companies like LinkedIn, Facebook, and Twitter make sense due to those companies’ incredible network effects and the fact that, fundamentally, these companies are creating value and will get better over time at monetizing that value. Net-net, Groupon is unsustainably destroying value and will implode sometime in the next five years. When that happens, it will almost certainly, and totally unfairly, wreak havoc throughout the tech ecosystem.

Posted in Knewton | 266 comments



  • Anonymous

    I wrote a blog (here: http://bit.ly/lhSXfA ) about Groupon not being a viable option for small businesses a couple months ago, but at the time I didn’t realize that Groupon was actually losing money. That’s very interesting and I’m very surprised that they can’t turn a profit with revenues that high.

    I do agree with you that if Groupon isn’t able to figure out how to monetize what they do, they will fail, and it will hurt other tech companies as well, but for now, I also group Facebook and Twitter into the same category.

  • http://twitter.com/GotPerl Jordan Conley

    They aren’t making money because they are putting all their money back into growth/new markets. They have positive gross profit on each deal they sell. I’m not saying they are financially healthy (they have liabilities much higher than their assets), but I don’t think they are anything even close to a Ponzi scheme.  
    The author of the post greatly underestimates the sophistication of the investors involved- the “artificially” high revenues aren’t artificial at all. Groupon does have a high Cost of Goods Sold (the money passed back to the merchants) but that doesn’t make it a Ponzi scheme.

    • Rob Roland

      From my understanding of the article, the point isn’t that Groupon isn’t profitable – it’s the long term viability of the business model if the merchants featured on Groupon are not profitable.

      I don’t know that I would consider that a Ponzi scheme, but it certainly sounds unsustainable when described this way.

    • http://twitter.com/chrisduncan O.C.D.

      A Ponzi scheme is when investors are paid (non-existent) profits out of other investors’ principal. The problem is that their principal disappears and the “profits” paid out are end up being substantially less than the principal bilked out of them. The promoter of the Ponzi scheme’s main goal is to convince more people to join the scheme and for people to commit more money to the scam. So Groupon isn’t doing that.

      No, Groupon takes a retailer’s product and gives you 25% of the retail price for it. Instead of fake profits (you’re taking a loss unless you have a high margin product, nobody redeems your Groupon, or you do a great job up-selling), your return on investment is fake customer loyalty. And Groupon’s cut of their customers’ deals just goes right back into adding more people to the cycle.

      Ponzi scheme? Not quite. But if a Ponzi scheme got investors to agree to take 25% of their initial investment, it would be a profitable “business” too. This isn’t even an argument about what their financials say…

    • MJ

      He’s not talking about the business model being the Ponzi scheme, but rather the way they have brought in investors.  It is somewhat analogous, as the new investors money is mostly going to pay of the previous investors, but…the logic of calling it a Ponzi scheme falls short when you realize that, unlike a Ponzi scheme, each next round of investors has full knowledge of the financial situation of the company.  I think Groupon is more of a classic case of “greater fool theory”…now we just need to see who the greater fool will be, the last round of private capital, or the public if / when they buy into the IPO?

    • Ccuthbert2001

      “The sophistication of the investors involved”??????????????? hahahahahahahahahahahahahahahahahahahahaha. Wait a minute, gotta dry my eyes from laughing so hard. Did he just say, “The sophistication of the investors involved?” Whoa, still giggliing…. Sorry Jordan, but you must have been born yesterday. Or at least after the 2007-08 Wall Street debacle.

      God, that was funny.

  • Seth W.

    Interesting article. Open question for anyone who’d like to give it a shot: How is this not criminal? It can’t be argued that they are acting in good faith, given the money pull outs by insiders.

    • Leland

      Probably because if the government starts going after startup companies, they will decrease the breadth of ideas that are executed on in fear of the government going after them.. perhaps?

  • http://feldmanfile.blogspot.com Len Feldman

    The point isn’t that they’re a Ponzi scheme for investors–they’re a Ponzi scheme for merchants, mated to a business model with no significant barriers to entry for competitors. Unless merchants return to Groupon in big numbers, the only way for Groupon to grow is to dig deeper and deeper into the merchant base of the cities it serves, but even then, it’ll run out of merchants sooner or later. That’s why the company is hiring so many salespeople and moving so fast to enter new markets–it has to get growth through saturation selling and penetrating new markets.

  • Anonymous

    Interesting thesis.  I imagine there *are* considerable merchants providing (or have the ability to morph) services which fit into the “70-90%” margin category.  Between the high margin merchants and merchants posting cyclical loss-leader promotions, the model could be sustainable.  
    But with growing competition, can Groupon dominate this model and grow into new global markets? 

  • Mark Entingh

    It all makes sense, and I realized how destructive Groupon was when I wanted to sign up and use their services, figuring that they were going to first make me give a 50% discount, then take another 25% and I’m left with almost nothing, except for discount-hungry customers.

    • http://peter.evans-greenwood.com/ Peter Evans-Greenwood

      Groupon is a great way to find and build a connection with all those coupon-clipping customers that you would rather not have.

      • Leland

        Indeed.. except these coupons are for 75% + off of your profit.

      • Anonymous

        This is harsh considering I’m an avid Groupon user but I don’t usually clip coupons. I also tip 20-25% when using Groupon so I’m not sure why the business would “rather not have” me since some non-groupon users that tip my bf (he is a server) seem to think $5 is a good tip on a $120 tab. He’s extremely nice and consistently rated as one of the best servers so it wasn’t because he gave bad service. Am I the only consumer in this entire thread or am I the only one concerned with “users” here?

        • http://twitter.com/PersonalFailure Personal Failure

          Let’s do the math:

          The product/service is normally $100, which is not set at random. That’s a price carefully chosen by the merchant to allow them to make enough money to stay in business.

          With groupon, the merchant is only going to make $25. (They mark the price down 50% to $50, then they have to share half of that with groupon.)

          So, you kindly tip 25%. Of what? Of $50? Whoopee! The merchant now makes $37.50 (assuming the tip didn’t go to the server, in which case the merchant doesn’t get anything of the tip). That’s still $62.50 (almost 2/3) less than they would normally make on that product or service. 

          Even if you tip 25% on the original price of $100 (which you don’t), they’re still only coming away with $50- half what they need to make to stay in business.

          Groupon is great for consumers, sure, by being terrible for merchants.

          • Irwin

            In Europe (i.c. The Netherlands) the merchant would receive less than 50%, since Groupon takes 50% + VAT (= 29.75 high tariff/€ 26.50 low tariff). The merchant receives 50% including VAT, so he ends up with € 17.02 (high tariff) or € 19.10 (low tariff).

          • Simonsdad08

            “Product/Service is normally $100″
            “So, you kindly tip 25%. Of what? Of $50?”  

            Deceiving math you use there buddy

    • guest

      businesses can get customers through their own PPC campaign by spending less money on what a groupon will actually cost them.  groupon employees like to use antiquated marketing methods to sell businesses on the ideal to use groupon. they will tell them: “look if you spend money on direct mail, newspaper advertising, television ads, radio it is going to cost you thousands of dollars more than using groupon” failing to tell the business that if that business used a PPC campaign, gather emails and blast continuous offers to the customers themselves they could actually save thousands of dollars BY NOT USING GROUPON!!!!

      • Leland

        Well yes, it stands to reason that Groupon’s employees would not try to argue against Groupon. :)

    • guest

      businesses can get customers through their own PPC campaign by spending less money on what a groupon will actually cost them.  groupon employees like to use antiquated marketing methods to sell businesses on the ideal to use groupon. they will tell them: “look if you spend money on direct mail, newspaper advertising, television ads, radio it is going to cost you thousands of dollars more than using groupon” failing to tell the business that if that business used a PPC campaign, gather emails and blast continuous offers to the customers themselves they could actually save thousands of dollars BY NOT USING GROUPON!!!!

  • Kinergy

    What might be interesting to consider is, if you had a very large and organized local sales force at your disposal, how would Groupon’s business transform into something beyond the current scheme into something more sustainable for all stakeholders?

    • Leland

      To be honest, at this point, I doubt they really care about being sustainable. Their brand name is already directly tied to massive discounts. *shrug*

  • http://twitter.com/jmrowland jmrowland

    Let’s not gloss over the inherently ponzi-scheme nature of Walmart’s business plan, either…

  • http://www.javarants.com spullara

    How many new merchants are created each year? I imagine that in starting a local business, using a service like Groupon could be part of those starting costs in order to get initial visibility. That could the be theoretical end-game for these kinds of businesses, promotion for new merchants. Especially since I think you are right that it can’t work for the merchant long term.

    • Anonymous

      The good thing about the groupon business model is you only need to find 1 willing merchant each day.

      If your sales team go to 100 merchants each day and check who would be willing to offer the biggest discount (to be featured on Groupon) the business who offers the biggest discount has almost certainly made a mistake. Basically 99% you have contacted have said that discount is too heavy to be worth it – and 1 poor sucker merchant has accepted.

      That’s a very basic outline of it, but it is how the overall system works.

      If Groupon was good for business then the 100 contacted merchants would outbid each other with lower offerings until it was only acceptable for 1 (sucker) that day.

       

      • Leland

        Yes… when I read their slogan “One City. One Deal. One Day.” (i don’t feel like correcting the order), I couldn’t help but think “fail”.

  • Erkki Lukk

    Well, as the company does not create any value, I cannot see a point in investing money in such activity. What they can do, is rip off the revenue of the companies that actually do create value – that is not sustainable.

    • Anonymous

      Yeah – just like TV companies and Billboards don’t create value.
      Have you heard of the services industry? It’s kind of a big deal…

  • http://twitter.com/franktlyman Frank Lyman

    Really good description of the problem, in my opinion.  The current Groupon model is a massive “trial” engine for merchants and consumers, but won’t create enough value to get repeat business.  

    My tech entrepreneur side hopes that Jose is wrong, but my wife ran a small business and my instincts from that experience tell me he is right.  

    The most important thing about Groupon valuation will be the audited repeat merchant numbers (similar to the “same store sales” equivalent that is so important in retail).  I wouldn’t put a dollar into this company until that metric was transparent.

    Of course, I felt this way about Priceline 10 years ago and they proved that a company can get traction with a model that doesn’t work, and migrate to one that does.  Let’s hope Groupon figures that out as well.
      

    • Leland

      Frank – great comment. :)

  • Idioso

    it’s not a ponozi scheme because the people who come in later are not paying the people who came in previously.

    • http://peter.evans-greenwood.com/ Peter Evans-Greenwood

      The participants in this ponzi scheme are the new investors in Groupon, since Groupon management has a trackrecord of ripping out cash from each financing round to pay the last lot of investers. The “group buying” thing they’re touting is just there to attract new investors., and the local merchants are just collateral damage.

      • Anonymous

        Haven’t you just described most startups and public offerings? Whenever you buy a share of stock, you’re paying money to an earlier investor. With a public offering, some of that money may actually be reinvested in the business, but once
        on the secondary market, it’s all to the previous owner.

    • Anonymous

      Exactly – just because it’s perhaps not a good long term strategy does not qualify it as being a ponzi scheme. Using that logic heaps of products are ponzi schemes

  • Harry Lime2

    You miss a huge part of the appeal of groupon for merchants. They are discounting the goods or services in the coupon by 75%, but if the customer spends 2-3x the face value of the coupon, the discount drops to 37.5 to 25% right away. I best most restaurant coupons are for far less the cost of the meal. In addition, The profit margin for a non redeemed coupon is 100%. I am not saying it’s a great deal, but it is far less bad than you portray.

    • Nate

      From what I’ve read in the past, in interviews with merchants, is that the customers that Groupon attracts are bargain-hunters.  These customers do not come in and spend 2-3x the face value of their Groupon, the majority spend just barely over it. (This is just anecdotal evidence – I would love to see if anyone has more concrete data on this…) And aren’t restaurant margins about as thin as it gets? The only way Groupon’s deals are valuable for merchants is if customers return, sans coupon.

      I have heard that Groupon keeps all revenue for unredeemed coupons, but that is just a rumor, I don’t know if that’s true.  In any case, businesses should be trying to create valuable products and services, not sell coupons and pray that no one redeems them.

      • Anonymous

        A good mate who owns a restaurant and did one of these deals after said it was outright amazing – many people would come in and spend EXACTLY the amount of the coupon. They didn’t want to go 50c under and heaven forbid they went 50c over and have to pay more at full price

        • AnonGuy

          Imo that’s a bigger issue. I eat out all the time and never know what I want when I walk in. The waiter can make a suggestion and sometimes I’ll pay more. But with a coupon that is not the case. You’re giving discounts to tons of people only willing to pay bear minimum because otherwise the price jumps up substantially.

          • Anonymous

            Busy restaurants wouldn’t run Groupons…

          • AnotherAnonGuy

            He was saying that a previously slow restaurant runs the coupon and becomes busy due to the “coupon clippers”, thereby driving high-paying customers away.

    • guest

      businesses can get customers through their own PPC campaign by spending less money on what a groupon will actually cost them.  groupon employees like to use antiquated marketing methods to sell businesses on the ideal to use groupon. they will tell them: “look if you spend money on direct mail, newspaper advertising, television ads, radio it is going to cost you thousands of dollars more than using groupon” failing to tell the business that if that business used a PPC campaign, gather emails and blast continuous offers to the customers themselves they could actually save thousands of dollars BY NOT USING GROUPON!!!!

    • guest

      businesses can get customers through their own PPC campaign by spending less money on what a groupon will actually cost them.  groupon employees like to use antiquated marketing methods to sell businesses on the ideal to use groupon. they will tell them: “look if you spend money on direct mail, newspaper advertising, television ads, radio it is going to cost you thousands of dollars more than using groupon” failing to tell the business that if that business used a PPC campaign, gather emails and blast continuous offers to the customers themselves they could actually save thousands of dollars BY NOT USING GROUPON!!!!

    • Ned

      Actually, the issue is that most people stick to the amount of the Groupon. 

  • Tenantdispute

    Come on people- The Head owners and initial investors have already cashed in enough money to make several small countries envious and more money than most start ups make many times over. Do you think they really care what happens now?

    • guest

      have them enjoy the fruits of their labor for now, but if this turns out to be a ponzi scheme then this should be something for the SEC to investigate and prosecute to the full extent of the law.

      • Anonymous

        “full extent of the law”does not apply to businessess, only to little people and useless eaters.

  • Anonymous

    We may not know enough yet.  The idea that the whole model is predicated on 50% off with the merchant getting 25% and Groupon getting 25% is specious.  Does Groupon still have a business if the discounts are more reasonable or packaged in such a way as to appear reasonable?  Does Groupon still have a business if the discounts aren’t as steep?  Does Groupon still have a model if the merchants get a greater cut of the revenue? Perhaps.  The real math needs to be done to see if, after the land grab, the market can stabilize around a more nominal discount with a greater share going to the merchant.  Groupon would still have almost 100M subscribers at that point.  My perspective is that it’s not really about bargain hunters as it is about effectively using email to merchandise a single Call to Action well.  You present an offer to enough people and it’s interesting, enough people will click on it.  And you may be able to lay off a ton of sales people after you’ve acquired the merchant relationships and the audience internationally.  It’s not completely ridiculous to use your balance sheet to finance an initially unprofitable expansion strategy.  The liquidity is still gross though.  And it’s unsettling.  But they do have options to keep merchants happy once the euphoria fades.

    • kidmedium

      You make a really great point: Why do we assume Groupon’s model is not subject to iteration? Clearly they’ve resisted changing the backend splits thus far to prop up their valuation. But once they’re public there are a number of ways to pursue sustainability vis a vis a greater social return. Not only can they modify their splits (such as a loyalty system where repeat clients are rewarded with an increased share, eventually minimizing Groupon’s take to 10%) but I see a huge opportunity in SMB marketing services. Someone above mentioned the failure of clients to optimize the increased flow of customers. Why not teach clients Customer Experience 101 so that a Groupon becomes a truly acquisitional exercise? Won’t Groupon be well positioned to create a workbench of tools for SMBs including email, social marketing and bundled offers with complimentary local businesses? Hasn’t every media titan from AT&T to Google been chasing the SMB ad business for the last decade – and yet how many local upholsterers are making use of SEM or Twitter for example?

      Groupon has managed to capture the attention of 83 million subscribers and a quarter of a million businesses (current run rate for 2011). Oh and they’re barely three years old. While it’s true that “what got you here won’t get you there”, I’ve discovered no set of facts which suggests the company isn’t thinking about and planning for Groupon 2.0.

  • the college student

    You are speaking in general terms and making a lot of assumptions.
    Do you have data to back up your assertions?

    Please look at the deals that are being offered. If they were all goods, I might agree with you. A huge number of the discounts are attached to services. How much does it cost a photographer to do a four hour session? Or a pilates instructor to bring in 100 more people in the next month? Services can be quite lucrative.

    Another thought, how many of these coupons will go unredeemed? Whatever that percentage is, that’s all profit.

    • Anonymous

      Absolutely agree.  This thesis is weak.

      • Clark

        The thesis would only be weak if Groupon hadn’t started with mostly goods/products. There has been such a noticeable decline in the quality / type of deal since Groupon started I can hardly believe it. We’re also witnessing a bunch of services offer artificially expensive services to ‘creat’ the discount.

        • Leland

          The slow (or fast, if the company is ballsy) inflation of a product’s price before being discounted is a well known fact that has been practiced for pretty much the entire history of the product and services market.

    • Ned

      The issue with services is actually worse. The SMB pre-sells, collects the cash, and then must pay people to fulfill, regardless of when the buyer chooses to redeem. Cash flow nightmare for an SMB. The “unfulfilled” notion is covered under the term “breakage.”

      • Anonymous

        I believe that it is the reverse. Being paid UP FRONT and then paying out later is massively cash flow positive (if you are growing).
        This is a dream for many SMBs.

        To be clear, many small businesses fail because they run out of cash.
        They run out because they have to pay suppliers and staff FIRST, before their customers come in and pay them.
        With a coupon it is the opposite so they would love it.

        • Ned

          Actually that’s my point. The whole appeal of Groupon  to SMBs is cash flow. The problem is that SMBs get the cash up front, which may satisfy an immediate need, but the redemption window for Groupons far exceeds the short term cash flow benefits to the business. So SMB’s pre-sell services or inventory, often use the money for operating expenses, and ultimately are stuck servicing Groupons for 6-12 months, often at the expense of normal customers. Theoretically an SMB could set the Groupon cash aside knowing that the outstanding Groupons are a liability, but that’s not what they tend to do in practice. As you so poignantly point out, many SMBs perish because of a lack of capital. These businesses are historically not sophisticated money managers. A side note- in services, you pay staff for hours they have worked, not in advance.

    • http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

      Services are indeed different than goods.  

      Unfortunately, think about your examples.    There are plenty of photogs and pilates instructors out there. Too many, in fact.  Hence their desperation to use Groupon!   If you aren’t offering 50% off this month (and 75% off your own gross as Groupon takes their cut too) then someone else will be.   And Groupon will be emailing them telling those same customers that fact!     Bargain hunters driven to a service aren’t going to pay double what they have to out of loyalty.  That’s the point.    Unless you can keep giving them 50% off you will simply have gained a few unprofitable customers for a brief period, actually losing money in the process.  Only if you had some massively unique new service nobody knew about and people simply had to have on a continuing basis, and it introduced them to it, would Groupon make sense.

      Normal consumers will pay a little more for what they perceive to be a better service.   But they won’t pay double, and many bargain-hunting types often won’t pay a dime more. 

      Offer me a meal at Applebees for $10 inclusive or Fridays for $20 inclusive and I’m taking Applebees even if I prefer Fridays a little bit.  Heck. If I was broke enough to troll Groupon for deals you could offer me a $5 full price meal at McDonalds  or a $30 “half off” one a Chez-Snob and i’d take the McD’s!
        

  • http://www.facebook.com/profile.php?id=1055886715 Caroline Evans

    If you read the financials in the SEC filing for the IPO you discover Groupon is a black hole of losses..  they are in the toilet and swirling on down the pipe.

    The need swarms of gullible simpletons to buy utterly worthless stock in a company thati reinventing the wheel .. poorly.  There have been companies selling books full of discount coupons for the past half century, if not longer.

  • Brian Hirsch

    Jose,

    You know I think you’re brilliant and I think you make some great points but there’s one class of merchants that are a perfect fit for Groupon and may represent a large market. Businesses with high fixed costs and little to no variable cost to adding an additional sale. For example, a yoga instructor that pays $2,000 to rent a studio and has classes that are onky half full. The marginal cost to add another customer is essentially zero so any customers Groupon can bring is pure profit. There are millions of small businesses that work under this model.

    One could argue the real issue is price optimization for small business services. Perhaps if the yoga studio owner could set price by demand like the airlines the Groupon opportunity would disappear.

    • http://twitter.com/vvpreetham Preetham V V

      The challenge with this argument is exactly the “All customer defects” as per the prisoner’s dilemma. When the initial paying customers get a wind on what you do to fill the remaining capacity of the Studio, they start defecting to wait for that deal… and this catches on. Airline and similar (Hotel) industry is only very few industry which can afford to operate in this model as people are ‘pressed’ to fly and cannot always wait for a deal. For everything else, they will wait for a deal. This is already happening in the SMB markets, Regular paying customers are defecting to wait for deals. Not only that they would now not mind to switch loyalty to the Merchants if someone else gives a deal… And the prisoner’s dilemma feeds on itself to erode value out of the system.

    • Mmullens1

      Brian makes a good point here, and Preetham, below as well, with current customer defects. However, this concept is much less attractive when the yoga studio, or similar business, must pay other instructors to teach/instruct those new students. The concept, in this example quickly becomes less attractive the more people that use it, and thus counterproductive from a business perspective. The Groupon business model then hugely encourages patrons to chase the next big discount, and in an area with many yoga studios, tends to discourage loyalty, the backbone of yoga studios. This ultimately drags down the already thin margins industry-wide in their respective markets.
      While it looks good on the surface, studio owners and managers need to fully understand the ramifications of utilizing this service and how it will ultimately impact their business and client base.

    • Anonymous

      Brian,

      Your response has the illusion of being correct to the small yoga instructor, as you mentioned.  However, in the aggregate and over time, the yoga instructor will be losing full paying customers for groupon customers (or the likes) as the collective public starts to revalue the yoga services to what they are consistently being sold for (via various different yoga studios across the different deal of the day sites).

      In the end, if the business cannot afford to sell their services at 50% off indefinitely, then the model is not sustainable.  

      Groupon could some value to highly differentiated businesses that have a product that many people would say “I would be very disappointed without that product”, because they can learn about it and try it from Groupon and the company will retain customers. However the main reason most businesses that run Groupons do it, is because they are not very differentiated and struggle to get new customers because of a lot of competition.  (How many yoga instructors are in your area?).  This is not a sustainable model for them.

      • 5ftflirt

        But the yoga or gym discounts are for a finite period of time. 10 classes or a month or whatever. There is some incentive to switch to full price and stay at the same place. Most people don’t hop from gym discount to gym discount. If there are many competing yoga teachers or gyms, that’s why you want to get them to try yours.

        • Tyler Riddle

          You can’t put a higher paying customer in a spot where a lowing paying customer exists. This hypothetical yoga instructor would book herself out with reduced profit to service a set of customers who will ditch as soon as prices come back up. In the short term there would be some additional revenue but the long term trend is to fill the place with people who both aren’t nearly as profitable as normal and have zero loyalty. That’s not helping this hypothetical yoga instructor at all.

    • 5ftflirt

      I just read this after I posted my comment saying the same thing. Yes.

      • Jweiss

        a sdfsdf asd fasdfsdfasdf 

    • Pete

      I agree with what you said about Yoga Studios and those types of businesses. However, the large majority of businesses that do not fit that profile, like restaurants (most run a 30% or more food cost and with Groupon will only take in 24%…do the math, it does not work unless they spend more or come back as regulars) or retail, well, when you take all those other businesses out of the mix you are left with… businesses like Yoga Places! Not enough to maintain a healthy following of email subscribers. Soon the majority of the subscribers will start to opt-out because there is not enough value anymore to be bothered reading it. Anyway, that’s my opinion. Short lived Fad! No real long tern value!
      Pete

    • http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

      You do make a good point here about high fixed and low variable costs.  However, in a deep inflationary recession, how many folks do you think are out there looking for yoga lessons?    That sort of thing  is a conceit of the wealthy, and the wealthy do not coupon.   But besides that point, that instructor will not be in business long if they are adding marginal revenue at only 25% of the norm.   They have to eat and pay their mortgage on home, too.   Plus, how long do you think their clients paying full price will continue to do so when the class is suddenly flooded with new Groupon members paying 25% of what they do?   Good point you make, but I’m still waiting for an example of how this thing works with a real business.   I’m in a very low cost business, but even my variable costs are about 20% of my hourly gross.  I’m not working for 5% over that, I’d rather stay home.   But thankfully I’m able to get plenty of busines with just a good web page and word-of-mouth.   I dont’ even advertise anymore.    You can’t really “buy” customers, like Groupon wants you to think.   You have to earn them over time.

    • Timiller

      Jose you are naive because HBS didnt do you any good…. Why don’t you think about what you would do with groupon if you were the merchant…… it’s a hint for you…
      By the way… I really like your namesake Jose Mourinho… Look him up and learn from him…

  • http://www.thelostagency.com/ David Iwanow

    But a business that is empty and losing money any way has a lot to gain from a Groupon deal… think about it you don’t have to pay for additional advertising to get numbers through the door, their audience will just turn up.

    Look at the the growth online marketing channels… that never used to make much money for business and now you have businesses setup just to run online.  The same might be true in time for local deals/coupons a new business model that can make money on that…

    But now I would say it works best for a handful products or services.

  • http://twitter.com/Zimana_ Pierre DeBois

    You raise some good points, but I think an additional thought is to not be too linked to one way to market the business, one way for people to discover your business – particularly with offering a discount. The customer service and how the business targets its customers will determine if Groupon is worthwhile.  I think an IPO may be better if additional services were developed: LinkedIn did this, and I think the value is now paying off for a wonderful Wall Street start.

    • wkrusscpa

      As to the LINKEDIN IPO, the brokers who initially priced this offering should be sued.  The opening price in the low $40′s that skyrocketed to over $122 by the end of the day meant the opening price was severely underpriced, and LINKEDIN lost a LOT of money on the IPO.  However, the initial buy-in was not favorable to the man-on-the-street either.  The brokers had first dibs on the shares and unloaded them on the retail purchaser as the market price rose so spectacularly those first 5-6 hours.  The market cap by day’s end was simply the result of the investment bankers being terribly greedy (as well as the retail purchasers trying to get in on the bandwagon).  By end of day the market implied capitalization, at ~$8.9 billion, was valued at 35-times its 2010 revenue and more than 500-times last year’s meager 17-cent-per-share profit.  That’s truly a wonderful Wall Street start, but not so good for LINKEDIN or the man on Main Street.

  • http://www.twitter.com/ebellity Emmanuel Bellity

    Agree 100%, couldnt say it better !

  • tomthebaker

    Our local city bakery did well with Groupon.  We offered it twice, and have seen a 25-30% increase in retail sales over the same period.  However, we are unlikely to use them again soon, as there is a rate of diminishing returns in discounting to existing customers, and the percentage of existing customers receiving discounts will increase, and the rate of growth with Groupon will decrease, the more Groupon is used.

  • bob

    If it was just about the money they would have sold to google. They have a plan and it must be working. 

  • bob

    If it was just about the money they would have sold to google! They must have a plan.

    • Reuben Sutton

      Yeah, more money.

    • Anonymous

      the plan being … more money!

    • Leland

      profit. 

  • http://twitter.com/DanFarfan Dan Farfan

    “In fact, Groupon immediately remits half of those “revenues” back to the local merchant…”

    Well, not exactly… From GRPN S-1: pg 15

    “We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs”  (oh my)

    “Our merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date. In North America, we typically pay our merchants in installments within sixty days after the Groupon is sold. In most of our International markets, merchants are not paid until the customer redeems the Groupon.”

    “..not paid until the customer redeems the Groupon” => we get double the spoilage in many places. ($cha-ching$) 

    Using the merchant’s money to operate means a significant computer outage squeezes operating cash immediately. It won’t crush them immediately of course, after another $750 rock is raised in the IPO. :-) This risk is appears (in more eloquent words, of course) in the S-1 on pg 21.

    • Leland

      Wow I wonder how many SMB owners would continue using groupon if they saw that their money was being directly used by groupon to finance other things, and that they were also getting ripped off compared to America.

  • http://twitter.com/DanFarfan Dan Farfan

    Interesting… Ponzi variant or Pump and Dump variant?
    Somewhere in between, perhaps. Or an intermediate step to the right answer that replaces the (unexplainable) word “coupon”

    The number in the S-1 that caught my eye more than the dollar amounts was 19%.
    The penetration into their 83 million “subscribers” who have EVER purchased a groupon (as of Mar 31, 2011). I suppose the next layer of that onion is what % of the 83 million redirect the offer emails to “junk” (or any folder out of the way) without actually unsubscribing.

  • http://twitter.com/GroupayMatt Matt Robinson

    Great post, I agree with pretty much everything except for the suggestion of a “sustainable Prisoner’s Dilemma” game-plan, it would not just be naive but delusional if this was the case.

    Also worth adding that more focused clones are going to continually erode their market by working with specific retailers. And possibly develop more sustainable models by building a more stable user-base and collecting a more useful information set on these users for retailers.

    The question mark is how long it can go on for, how long can they keep outrunning their destiny by virtue of growth in new territories? As more and more clones spring up in other geographies and markets D-day looms ever closer.

  • http://tomsucks.wordpress.org 7oby

    Restaurant.com is a ponzi scheme

  • Dave

    You don’t have a clue what you’re talking about.  Groupon is advertising for merchants.  Let’s compare:

    Let’s say there are 50,000 folks on the Groupon email list in your market.  How many folks will look at this list?  let’s say it’s 20%, so you have exposure to 12,500 potential customers.  You offer a $20 resturant coupon for $10, so you’re spending $15 per person who redeems and capping it at 500.  Let’s say all 500 redeem.  You’ve spent $5000 bucks ($7500 in retail prices, minus the $2500 you actually bring in).  But, you have 500 folks (in the case of a resturant it’s more likely between 1000 and 2000 folks) who have now used your establishment.  Certainly many will never come back, but not all will never come back.

    Now, let’s compare another method of advertising – direct mail, one of the more inexpensive ways to advertise.  You’ve targeted the list, and paid for it – lists usually cost a minimum of $1000.  You drop 7000 targeted pieces.  Let’s say you get a great price and postage + printing costs comes out to $0.60 per item.  Congrats – you’ve just spend $5200, $200 more than it cost you on Groupon.  What do you get for this? Zero folks who have tried your goods or services, less thank 1/7 of the total exposures, and no one who knows your product.

    This doesn’t count additional dollars spent at your establishment when the Groupons are redeemed – say the average bill is $30 for your $20 Groupon customer – that additional $10 carried significant profit.  Also, a significant percentage will never redeem, so that’s pure profit to put against the overall bottom line.  Let’s say with these additional factors, you’ve really spent $3000, not $5000.  And this doesn’t count the additional exposures of people being made aware of your business who didn’t buy the Groupon but may still now frequent your business at some point because they are now aware of it.
    By your methodology, all advertising is a ponzi scheme, so no merchant should ever advertise, even though advertising can create enough customers that at times, increasing advertising increases overall profitability.

    I’d advise you in the future to only write about things you understand.

    • Evan

      I agree with Dave. This article is poorly thought out and sensationalist. What it lacks in valid point making it replaces with vague exaggerations. 97% of merchants say that they would use Groupon again. Prisoners dillemma? Are you sh*ting me?

      • Bdcahoon

        97%!? Where on earth did you pull that number from? I consult for small, medium businesses. Almost all of them have run a daily deal and while I can’t quote a specific percentage like you seem to be able to do, I would say a ball park estimate is more like 5-10%. No joke. No BS.

        • Leland

          Bdcahoon it would be nice for you to share some more thoughts based on your experience with those businesses. Perhaps feelings between groupon/living social? Is there much of a difference in sentiment?

      • Ned

        Um, where’d you get that number?

      • Anonymous

        The 97% number comes from Groupon.

        • http://twitter.com/sgogolak Steve Gogolak

          They might get that response on Day 1 of the deal. They will NOT get it on day 180.

      • http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

        So, how do you like working at Groupon, Evan?  Benefits good?  : )

      • http://twitter.com/sgogolak Steve Gogolak

        Count me as one of those (very vocal) 3% that will never, ever agree to a daily deal again unless, maybe, the commission is dramatically reduced.  First hand, I’ve had arguments with customers about terms of the deal, people who try to redeem after it has expired, other customers frustrated that the person in front of them got a deal and arguing to get the same.  The hassle alone makes me question ANY positive value.  Staff: demoralized.  P&L: screwed.  New loyal customers: where?

        Bottom line, all of these deal sites suck the life out of small businesses.  I say screw ‘em all.  They can take their unprofitable, high commissions and go to hell.

        • Me

          I own a small business and I do not recommend Groupon to anyone. A total nightmare and the most demanding, undesirable, clientele EVER! LivingSocial is merchant friendly. Advice: You will lose great staff and regular clients when you run a Groupon deal! I almost forgot – Groupon clients threaten to sue and write bad Yelp reviews often if you refuse to give into their requests for extras. 

      • JJB

        If it didn’t have a sensationalist headline, who would be here reading it? Not me, I haven’t even checked out groupon’s website, I assumed they were just another in an endless series of .com flash in the pan startups and put them in my mental “ignore” folder. The article seems well thought-out to me…

      • Mako1000

        Here is Dave now posting as Evan, or Evan is also a Groupon salespeson…LOL

    • guest

      obviously Dave works for Groupon. why did you just chose Direct Mail, which is one of the most expensive advertising methods? Answer is:  so that you can make your point on behalf of your employer who has brainwashed you!!!  that is comparing apples with oranges.  chose the same advertising method of acquiring leads for the business in the local market like groupon does.  let’s assume it is a yoga studio. that yoga studio can acquire local leads through the internet via PPC campaigns in their local area.  acquisition cost per lead would most likely be less, since they can go directly after customers who are looking for yoga classes and who will be most likely a longer more loyal type of customer.

      • Dave

        I don’t work for Groupon and for the record, prefer Living Social to Groupon. 

        • Ned

          What about the substance of the commenter’s pots?

          • Leland

            Dave doesn’t care to address any flaws in his argument, evidently.

        • Kurt

          There is one MAJOR  difference between Groupon and Living Social, LS pays all or your share at the close of the deal. Groupon pays it out over 6 months. I’ve used Groupon and it worked for a one time offer. I wish I would have known about LS. I could have used the money upfront to finance the 75% discount on the offer.

      • Dave

        I don’t work for Groupon and for the record, prefer Living Social to Groupon. 

    • Akira

      Interesting response. Groupon being more cost-effective than traditional advertising is the best argument in their favorite. Still, those are some pretty generous numbers you’re working with, and your assumptions about customer behavior are unrealistic. For one, in my experience, customers rarely spend much beyond what the Groupon covers. It is highly unlikely that these additional expenditures + unredeemed Groupons would reduce the loss by 40%.

      All revenue generated by Groupon is loss. The advertising benefit is likely countered by the fact that Groupon revenue begets more Groupon revenue. In a competitive market like NYC, once someone has paid $5 for an entree + appetizer, they may not be willing to go back again and have to pay $10; instead, they’ll just wait for the next Groupon or find a better deal at one of the thousands of other options. When they tell their friends about the restaurant and mention prices, surely they will mention the Groupon and encourage their friends to take advantage.

      Groupon is advertising. Essentially you are paying the consumer and a 3rd party to get them to try your product. However unlike, say, giving out free samples (which doesn’t require a 3rd party) Groupon distorts the customer’s perception of your product. Direct mail and other traditional advertising does not do this; anyone who comes to your shop as a result of a flyer pays full price and decides whether or not to become a regular based on the price you set. Groupon, by contrast, creates a customer experience that is bad for your business; customers decide that your entree is worth $5, but not $10.

      The numbers just don’t work for a simple reason: Groupon users fall into one of three categories; those who will buy your product once or twice with a Groupon, those who will regularly come but almost always with Groupons, and those who become full price regulars. The first two categories are net losses, and they will more than likely account for the bulk of the people Groupon gets you. The word of mouth generated will likely bring in customers of a similar break down. Even with unredeemed Groupons and customers spending extra, the most probable outcome is a net loss.

      Also, the snark in the last line of your post doesn’t make you seem smart.

      • Dave

        I chose direct mail as a comparison point, as it’s a popular method of distributing coupons for local merchants, which is what Groupon is competing with.  I intentionally left out the costs of the coupons themselves because they would be at price points set by the merchant, not a third party, so one can assume that the merchant isn’t forced into discounting their products at a loss. 
          
        Regarding the snarks in the first and last line of my post, Jose compares Groupon to among the most infamous criminal schemes in U.S history.  If this were titled “Groupon’s Business Model is Unsustainable”, I wouldn’t have snarked, but I wouldn’t have read it in the first place.  I came here because I wanted to know what Groupon was doing that was illegal, as a straight up Ponzi scheme must by definition be illegal.  I found nothing even close to illegality in the post, and found the article irresponsible on moral levels.

        • topeka

          Nonsense. Many Ponzi schemes are “legal” – it would be more accurate to say that occasionally a con-artist harms someone who draws enough sympathy or holds enough power for law enforcement to take action.

      • Jeanvan

        direct mail or any other form of advertising is paid for upfront whether it works or not,  At least with the daily deals you only pay for the customers who come through the door

    • Akira

      Also, you have to account for the loss in revenue from existing regular customers. A guy comes to your bar every Friday night. Once he finds out he can pay half it is unlikely he’ll keep paying full price out of the goodness of his heart. Direct mail isn’t going to drain 75% of your revenue from existing customers who learn about it.

    • Anonymous

      “ Also, a significant percentage will never redeem, so that’s pure profit to put against the overall bottom line.  ” 

      No, Groupon keep the revenue from unredeemed vouchers.

      • Jeanine

        Having worked with Groupon myself (as a merchant), I’d like to point out that your correction is incorrect.  Groupon pays the merchant based on how many were purchased, not how many were redeemed.

        Not saying anything in favour of one argument or the other, I’m somewhere in the middle, we’ll see once the coupon expires what we ended up making or loosing, but we should have correct facts on the table for argument.

        • Anonymous

          In the US, the merchant keep their share. In Europe, Groupon keeps it.

          • The Boss

            Groupon needs to show us the money. Money as in earnings and cash-flow.

    • http://www.freddestin.com Fred Destin

      Good comment but why no identity ?

    • Ned

      Comparing Groupon to a direct spend is a bit misleading, as its consumer appeal hinges on the discount and the pre-purchase. It’s not terribly targeted (at this point; I acknowledge that this may change over time). If you look at merchant complaints, the biggest issues are 1.) The incentives are so extreme and *new* customers only come for the price; 2) *New* customer retention is bad; 3.) The class of *new* customer who uses a Groupon  generally sticks with the amount of the Groupon, to the point where gratuities are being automatically surcharged. 4.) Unlike coupons, SMBs are pre-selling inventory and/or capacity at a huge discounts (incurring a liability), and, regardless of capacity or cash flow on the back end, they must fulfill. Many SMBs can’t deal with the mechanics and, ultimately, due to cash flow issues (not to mention variable costs) end up struggling to fulfill their offer, only to have abysmal customer retention on the offer in the end. Groupon makes Valpak look like a safe deal. Ponzi scheme? Perhaps not. But the local ad market has consistently sustained itself with a “low risk, low reward” approach that siphons money off of SMBs with little thought. This ain’t that.

    • Nitin1

      I completely agree with you. I did financial analysis for a company that wanted to start a groupon like service. To make a long story short, this article is so far from reality that I also think the author does not know much about it.

      I do think that Groupon is overvalued and whether the model is sustainable is to be seen, for different reasons than what is written here.

      • Jeremy Krane

        Specifics please?

    • Kurt

      Dave,

      You are right in the concept but, unless you have had experience with the Groupon system, you don’t understand. You are providing goods or services at 75% discount.
      I have used them. It works but you can’t afford to use them as a consistant marketing tool. What’s not mentioned here is that Groupon doesn’t pay out your share at the time of sale. It spreads it out over 6 months. Not only have you discounted your company offering by 75% but, you have to finance it as well.

      Sorry to say, it’s a one time deal for 90% of customers. The good news for Groupon and it’s investors, there are plenty of suffering businesses in this economy.

      Jose is right…it looks like, acts like and performs like a ponzi scheme therefor…

      • johnyaeger

         This is a very strong argument and I couldn’t help but find myself agreeing with you Kurt.

    • Cashew341

      Your whole statement stinks for many reasons.I will show you now.
      #1. Restaurant  ( resturant -according to you ) is not spelled correctly. 
      #2.Your math stinks, as 20 % of 50000 people is 10000 and not 12500.
      #3.For this working on a gross of 50% or better, Groupon does get them a quick cash injection that they did not have, AND NEED NOW,SO IT HELPS THEM  temporarily.
      #4. You should check all your facts before declaring that you are a _uckin -know-it-all.

      • http://twitter.com/sgogolak Steve Gogolak

        RE #3 – Groupon is moving to a “we pay you when you mark the coupon as redeemed” meaning no up front payment.  basically you get paid about 10 days after the person has redeemed the deal, so Groupon holds your cash and can profit off of it.

    • Anonymous

      @90adf35303e37adf3ab3724e19030657:disqus  , I’d have to say you are wrong. Ponzi scheme is defined as, “A form of fraud in which belief in the success of
      a non-existent enterprise is fostered by payment of quick returns to
      first investors using money invested by others; any system which
      operates on the principle of using the investments of later
      contributors to pay early contributors.” So yes, it is illegal. Groupon is not a fraud and I agree with @Dave:disqus that Groupon is not exactly a Ponzi scheme. I think this is an interesting article with some GREAT valid points but Jose should have chosen his words accordingly since Groupon does not rely on other merchants fees to pay its initial merchants. Part of the money goes to Groupon, part of it goes to the merchant and from a purely business standpoint, it not Groupon’s responsibility to ensure that the merchant makes a profit.

      Now I will shift my point of view and provide opinions from a consumer’s standpoint. I’m also considering the opinions of other friends, relatives, and accquaintances when stating this argument. Groupon might bring in new customer who become loyal and these customer may go over the limit of the Groupon. As an avid Groupon user, I almost always go over the value of Groupon when I go out to eat as restaurants (and so does everyone I know). If it’s clothing, ice cream, travel, or other categories, I stay within the limit but even that’s not a strict rule. For example, I purchased a $120 Groupon for $60 for spa services but most services cost under $115. In order to not let that $5 go to waste and also because my preferred service was only $90, I decided to get a shellac nailpolish manicure for $45. MUCH higher than the regular $25 I pay at my local mani/pedi place. In the end, I still end up paying $15 which is purely profit since it was not calculated in the cost when advertising on Groupon. Now going back to Dave’s argument about paper ad’s- they simply do not work for me. I’m a part of internet culture who does everything online. In fact, the only place those ads go is my recycle bin. I couldn’t even tell you what these newspaper ads print anymore because I don’t even glance at them! Others have blocked advertisers from sending them any kind of promotional material in order to save paper.

      Everyday, I get mail in inbox from Groupon and even if I don’t buy it, it’s still more effective since I at least know which business is on Groupon that certain day. And I have absolutely no idea where this “because it was on Groupon for $5, it must be worth $5″ is comign from. I know that often times businesses are providing a “special deal” through Groupon and if I was to go back, I wouldn’t mind paying $90 for the same spa service because it was really worth it and I don’t know if or when the Groupon deal is going to be back. Which brings me to another significant point I wanted to add. One time a friend of ours had a $50 groupon for a high end restaurant and he invited ten of us to go. We are usually pretty conscious of money so we had never tried that place before. But because he had a Groupon and it was weekend, we all decided that we should give this place a try at least once. Ten of us ended up in the restuarant. The place ended up having 8 more customers that night with not one single penny of those 8 people’s money going towards Groupon. The other friend paid from himself and his guest using the Groupon and he did stay at the $50 limit. Someone else compared it to giving out free sample but with free samples there is always a 3rd party involved because you have to get the word out and you can’t use your website because you want new customer who probably don’t visit your website all the time. So you use internet, radio, tv, or just shipping it out- that’s the 3rd party that the company pays. For instance for the Kashi granola bar ad, they spend X amount of money on advertising but what they don’t know is if it will bring in any customers! I sure haven’t requested my sample yet but if they were to put it on Groupon and say “Hey! You can buy 1 box of Kashi at any participating stores for .99″ then, I can say with a 100% guarantee that I would purchase that Groupon. I eat Granola bars everyday and I’m sure for 0.99 I can definitely give it a try and if it is indeed good, I might have new “favorite” brand.

      In the end, it is the business’s responsibility to make smart choices of how they advertise. For example, a restuarant where meals per person cost $20-$25 may want to sell a Groupon for $15 for $25 worth of food. Most people are unlikely to go by themselves and therefore, that extra person (thanks to Groupon) would be source of regular profit just like other customers. And Groupon doesn’t publish a deal everyday so no, business do not continously have to pour in for Groupon to sustain! In the beginning, there were only few days when Groupon had a deal for my city and other days, it would be replaced by an internet ad. Now the deals last a couple of day and sometimes there are only a limited # of purchases on a deal. I’m by no means Groupon’s advocate BUT Groupon allows a lot more flexibility with how and what cost to advertise than regular advertising. It’s a smart choice but it is the merchant’s fault if they think that every customer that Groupon brings in will become a regular or if they don’t cut back on other advertising in order to advertise on Groupon.

      EDIT: I did not know that Groupon keeps 50% of the price that consumers for the deal. Seems pretty high. That still doesn’t change the fact that Groupon is attractive (from a consumer standpoint). Also, I think that Jose should have mentioned a solution or possible solution. Okay, I get why Groupon could be a problem but what’s the solution? Any suggestions? I hardly doubt that telling people to stop purchasing lucrative offers merchants are offering is a good answer.

      And I forgot mention that many times, I don’t use a purchased Groupon until a few months later. By that time, I have already paid for it and forgotten about it and when I do use it, I am much more likely to go over the value since it’s almost like getting the stuff for free. I had the money for Groupon at the time I purchased it so now, it’s just like a gift card. I use it on whatever, and go over since at the time of using the Groupon, I am only responsible for paying a said amount over the Groupon value.

      • guest

        anybody who starts with a definition in their argument is an idiot =)

    • Henry

      Apparently my friend it is you that should not be writing on things that you do not understand.

      Groupon is not, and I repeat is NOT, a “real” form of advertising. The only thing that Groupon actually advertises is their deals, not the sponsors of the deal.

      You can throw hypothetical scenarios all day long to prove your points, but they will remain hypothetical at best. The fact that none of the top “daily deals” sites (groupon and others) never publish or provide statistics on programs and breaks them down by industries or categories speaks volumes about the validity of any of these claims.

      I know because I am a marketer. I head all marketing programs for my business. I studied marketing. My entire career has been in sales and marketing. With every avenue out there to market your service/product there MUST be a quantifiable projection of return on investment. Now with traditional advertisement, like direct marketing, there is hysterical data to pretty much have a feel of what to expect. Typically it is around 1-2%. Any deviation from this ROI has nothing to do with the actual method (in this case direct marketing) but rather the business that is being advertised, the product, the offer, etc…Groupon and the likes offers no ROI to the majority of businesses, because again, they are not advertising your business. In the case of ABC restaurant, Groupon is advertising a $20 three course meal for $10. The idea of being able to get a three course meal for $10 is the only thing that is now ingrained in the mind of the buyer. Unless the experience at that restaurant was out of this world, that same person is not going to come back and pay $20 for the same meal. That restaurant would be better off offering the dinner for FREE, that way the guest would not have any price sensitivity or resistance to this experience and rate it purely on his/her enjoyment level.

      Are there businesses that would benefit from this form of marketing? Of course there would be. But unlike most of the traditional forms of “online” marketing, it is not for the masses. More importantly, it down right destructive to many.

    • Darryl DuCasse

      Take your own advice, Dave.  Limit yourself to writing about things you understand. Not only are you insulting and condescending, but you clearly fail to understand this:

      Groupon perpetuates a discount driven economy that can only destroy businesses, destroy customer loyalty, and destroy local economies altogether. 

    • Mako1000

      You have to be a Groupon Sales guy for sure: “increasing advertising increases overall profitability” of course you framed it with “at times,” to CYA, but that’s a lot of bull.  The article is very well written. I’m sure you would try to sell us the miracle “wrinkle freeze” snake oil serum that Groupon was advertizing.  The United Kingdom determined it is misleading advertizing since none of the claims can be substantiated with solid data! 

    • Kurt

      you’re confusing advertising with couponing

  • http://twitter.com/googleamonopoly googlemonopolyeu

    There is no question about it, all of these 75%+ off purchased coupon schemes are inevitable failures long term.  That includes offers from non-Groupon companies like Google.  It doesn’t even matter about the non-redemption rate (as those non redeemed bought offers are typically covered under strict state law and aren’t immediate profit defaults to a business).

    What they are selling is a low and albeit profitable customer acquisition cost.   That would be fine in a normal boom economy circa  2005 or better yet, 1997 and where the customer bought, came in, enjoyed and came back over and over.

    Problem is, many people eating out off of Groupon deals have ZERO loyalty and will jump from one place offering a deal to another, so long as they have the money still to even be able to afford that.   There are tons of people who want to go out to eat, who use to, who now cannot afford to.  Groupon is the enticing to them.  That has to be a big chunk of Groupon’s buyers along with those < 4 years out of college and underemployed and hoping to live the middle class dream experiment those a few years older did.

    From a business perspective, Groupon can work over and over for services with low or fixed costs or those that have large ticket items.   The best examples of such businesses would be a massage therapist, escorts, maybe chiropractors, independent health related specialists (allergists, psychologists,etc.).

    Groupon will put restaurant owners out of business.  It won't work for much of Main street.

    Are we in another tech bubble?  Yes, no doubt about that.   It's much more tightly controlled, far less players and larger dollars in fewer companies.   The punchline to the jokes ends the same though, failure.

  • http://www.esrati.com David Esrati

    Groupon works with OPM- Other Peoples Money. They invest little in their business- take a huge scrape, provide no real lasting relationship benefit to their customers (the vendors)- and the Groupon shopper has no allegiance to anyone- they are just price shopping.
    It almost makes me feel guilty when I see a business I already patronize giving away value for the hope of converting customers.
    With so many social media tools to help spread the word of superior products, service and value- Groupon does nothing to help.
    Much like health insurance companies don’t improve health care- Groupon doesn’t improve business.
    Well written. Thanks

    • Leland

      Your comment was also well written. :)

  • Jack

    I think some of you are confused about non-redemption of Groupons – if a Groupon code is not redeemed and communicated to the vendor, they cannot claim the money from Groupon.

    This means non redemption = 100% revenue for Groupon, $0 for retailer.

    • AM

      that isn’t true – the vendor gets all their money upfront – Groupon doesn’t hold it

      • Jeanine

        Depends which country we’re talking about.

        In Canada, non-redemption=100% revenue for the retailer (as in, the retailer gets paid based on purchases of coupons, not on redemption).  BUT…
        We get a cheque for 1/3 of the total the day after it is featured, another 1/3 in 30 days, and a final 1/3 in 60 days.

  • Anonymous

    Great ideas here.

    Interesting that you note Wal-Mart, who is cited as being able to press suppliers who then recoup the loss in margins via internal “efficiencies”.

    My wife tells the story of Nestle SA, who, after the ubiquitous discounting Wal-Mart forced them into, saw other suppliers demand the same terms eventually, causing Nestle to dump their entire coffee business, except for Nescafe, which was rebranded and recast/repriced as a premium product in order to reestablish their margins.

    Wal-Mart was told to go f@&k themselves until they eventually agreed to begin selling Nescafe again. The same example can be seen in many cases in many places. Wal-Mart does see the occasional market correction due to their pricing models. Sometimes they kill entire product lines due to loss leader practices.

    groupon has turned every product it markets into a loss leader…but the benefit has no spillover even in the short term. I keep hearing about friends who buy from Groupon then find onerous restrictions placed on the coupons…such as no peak time purchases. All discount purchases MUST be in cash…ergo to avoid card processor fees. Etc. It goes on.

    I’ll end it there as I am likely repeating many of the excellent comments below. I like the idea of Groupon. But it’ll fade.

    • Leland

      I’m skeptical how much 2.5% savings in processing fees could really go towards making a dent in a 50% discount…. seriously :|

  • AM

    Agree 100%

    Also people will stop buying Groupons once they remember the ones they bought in the past and never used…

    FB will kill Groupon anyway before they implode – FB group deal model can’t be cloned and charge to merchants is $0

  • http://twitter.com/nevoda nevo hadas

    while groupon’s shareholders have been exiting as they go, the business is not a ponzi scheme and will fundamentally innovate its business model over time. looking at the flow of comments i think that the following aspects are important to note: 1. couponing has been around for a long time and still seems to continue – so i am not sure that this is a short term behavior in markets. you definitely dont discount all the time as a business, but it is an efficient way to do so when you need to.
    merchants will need to get smarter about how they use this tool i.e.
    discount one thing but not another (like wine vs the meal), or discount a
    meal size that is larger than the average meal size etc in this way
    they could increase margin and be more effective.
    2. on return business: it would be interesting to see how often businesses use groupon in a specific “area” as daily deals can only happen 365 times in a year per area, you shouldnt have more than 182.5 clients each doing a deal twice a year in any case
    3. groupon is a cheap form of advertising – this makes sense to me, it is a success based form of advertising higher up the value chain than CPC as it is CPA (acquisition). compared to other models to drive new customers, i would bet its highly cashflow positive (in other models the merchant has to give up money first and only receive revenue later).
    4. groupons margins will erode over time, 25% of ticket price probably isnt sustainable and will reduce as competitors increase (like google that has introduced couponing now)

  • Kimbye

    Reading the article confirms my experiences with the groupon business model.
    I actually work in a restaurant that has signed up on a deal with a company using the groupon model. 
    The customers we get in through the “groupon” offer does not bring us positive revenue or repeat customers.
    The customers we get through this offer are not interested in fine wine and food, they are simply in our restaurant because of the discounted meal, on which we loose money.
    Most of these customers don`t spend extra money on our wine package, a cocktail or avec.
    They usually drink 1 item throughout the whole 8 course menu, and quite often that turns out to be a glass of apple juice or mineral water. On wich we turn a profit, but far from being enough to sustain our business.
    The argument that the groupon model gives repeat customers or even the promise of a broader customer base, due to higher exposure seems in my experience to be wrong.
    Actually i think that type of marketing might even hurt your business.
    For restaurants and bars the way to success has always been to deliver great service, excellent food and drinks at prices that makes the customer feel they get good value for their money.

    • Leland

      Kimbye would you like to provide a small story recounting your experience with groupon? It would be very helpful to me getting out the word about the dangers inherent in signing up for the current batch of social commerce. If you could, please send me a hello over at xerevius (at) gmail (dot) com   :)

  • Schmalex

    I interviewed for Groupon, got offered the job, didnt take it in the end as had better opportunity. Their figures ARE inflated and 97% is not true about return customers, but they number one thing that most merchants fail to do is use their own abilities and offering to get that customer coming back. I have used over 30 Groupons in the past year and the 2 Ive returned to and used again as full paying cutomer were the ones who actually did what someone in this thread says and gives the customer a great experience-instead of treating people like ‘bargain hunters’. 

    That is the mistake Ive seen all too often with waiters or point of contact, quality of food in the voucher terms, the ‘dedicated Groupon booking line’, etc. Businesses will never give gain return business if they use the ‘Im going to give 70% less of my service as theyve only paid 30% of my full price’. Service doesnt cost anything and is without doubt the number 1 fail of these featured partners.  Im sorry, but merchants are very much guilty in alot of cases. Also, nobody forces merchants to feature-it is their choice, theyre all big kids…

    • Leland

      I’m sorry Schmalex, but I think it is a disservice to most small business owners to call them “big kids” after they have poured their personal funds, blood, sweat and tears (literally) into their businesses. 

      Starting and running a successful small business is one of the hardest things one can do. Certainly harder then a job at groupon selling coupons to misinformed owners that make the mistake of trusting what groupon says.

  • Robin Bugbee

    I am a merchant in Providence RI. I used Groupon once and I can assure you this article is absolutely correct: Groupon is a scam it simply does not work and is economically unfeaseable from a dollars and sense perspective. To prove this to anyone who doubts what I am saying I am willing to recount my exact Groupon experience to any reputable person seeking more information and can be reached at
    Robin@plaidandstripe.com

  • http://www.virtualeconomics.co.uk seamusmccauley

    The thesis is perfectly sound (if based on some assumptions where data wold be preferable) – the commenters knocking it look like very obvious Groupon rep management sock-puppets to me.

  • Nicolas

    When looking at your post, and at some responses. This is all black & white. This is not reality.
    First 50% coupon already existed for years even without groupon. They have multiple purpose:
    - selling “legacy”, “old fashioned” or “unsold” You have to make room for new shiny product… And selling the unsold at a bargain is better than just put them in the trash.
    - Optimization and market segmentation. A restaurant is not always full. Worker going to pub prefer to go on friday or saturday night. This is the time for premium price. Let face it, they don’t have the choice and have the money. But hey why not make more money and make unemployed, seniors or students go and pay less. You have the local, the cooker is here… It is just the price of the meal/soda. Why would you even offer the same meal? Regular menu cost you 5$ of meal, you sell it 15$. So the special offer menu, you take care of using low cost meal, costing you only 2$ and sell it for 10$. Not so bad.

    - Ads. The most important thing in business is that people know you exist so they have an oportunity to buy you good or services. Most of the time you do not have a monopoly, you don’t make something unique. And even if it was. People must know you exist. So you make ads. But people don’t like ads. They like special offers and bargains. So to make your ad more visible you offer a bargain. Go to my place with a coupon and i’ll give you a special offer. You need the product so why pay the full price?

    Of course, you melt all things together. You and other merchants do perform bargains, but only on happy hours or in some cases. Most of the time, client must pay the full price. Because  the bargain work only if lot of people apply to it, you can negociate bargains to provide your service too. Because all will eat the same thing, you will have far less unused and out of limit meal that go to trash. To give bigger number for bargains, in fact you regular price is even a litle inflated.

    This work greak because in fact the real bargain is not 50%. You don’t sell the same thing. Real bargain is more 20-30%. And you optimize usage of your time and resources that are up to a limit fixed cost. And for variable cost, because groupon work only if many people apply to the offer, you can negociate bargains for the good you’ll sell them. So in the end, this is not bargain at all for you. It is more business, more money.

    Of course people could wait and go only when you offer a bargain. Some will do. Some will never ever try to take benefit of the bargain at all. But to be sure, you and other merchants ensure that special offer are somewhat unfrequent or when most people can’t benefit of it. So there no risk at all.

    Of course Groupon can’t expect to make all product sold by it’s means. But it can hope to sell let say 1% of total good sold in the word. That really a lot of money. Hey in France, 1% would already be 15 billion € a year. In the world? Easy like 150 billion $ a year.

    Your thinking is based on the assumption that groupon can make money only if all merchants alway use groupon for most of they sell and that merchants then will not make money at all. This is not true 1% of all sell in the world is a lot for groupon and not bad for merchants.

  • Robinbugbee

     The difference is that Amazon was not a scam and this is. I have done a Groupon “deal”. Their model is fraudulent and unsupportable.  Here is the major difference: retailers make money working with Amazon. They lose money working with Groupon. Amazon has a major investment in their business: warehouses, inventory, staff. Groupon has nothing but a bunch of salespeople. Groupon is a fraud.

  • http://twitter.com/thestreetpundit The Street Pundit

    Great points in the article and in the response.
    Having read the entire filing in detail I would think there are several key points in the filing
    1)  A “same merchant sales” metric is very important because that is a a key to the business ( as was pointed out) but there is no such metric revealed ( although the company spent the time to create the ”Adjusted CSOI” metric. Once a merchant realizes that it may not work for him- there goes the whole model- remember – according to my analysis based on the s1 and assuming a 50% discount  - merchant are giving their goods off at about 71% – that can not continue
    2)Their revenue numbers are essentially inflated- due to their practice of counting gross revenues as opposed to “commisions” – ie revenues after payment to merchants. This is highly unusual given the lack of risk taken – could be it will confirm to GAAP, but even if it does the amount of capital spent to generate the 270 mil in revenues which they keep ( leaving out GAAP classifications ) is staggering
    3) Their cash flow is highly dependent on terms- and their terms- which are 60 days to pay back the merchants are exceedingly long and unlikely to be sustained- and even a small change could have major operating ramifications
    bunch of other items in s1 show areas of concern as well

    • Leland

      Very insightful TSP. You are right, without showing the % of repeat merchants there is no way to determine if the business is sustainable or not. If their return merchant % is less then, say, 60%, it means they are losing business *fast*. 

  • Anonymous

    I disagree with the premise that only discount chasers will come to new merchants and then move on to new Groupons. I have used a Groupon for a local salon that then became my new regular place to get haircuts, because it was a good salon. Some people will just chase the bargain, but if you are providing quality service or goods, some people will definitely come back.

    I own a small business and have thought about using Groupon but right now I probably couldn’t handle a rush. Still, I do tend to end up with very loyal repeat customers, so when I’m ready for it I think Groupon could really work for me.

  • sammyn31

    I totally agree with you Jose. To add to your point, because there is such a small group of merchants that fall in these 2 categories, many merchants have resorted to price inflation when selling groupons in order to come out with a profit or just break even/minimize their losses. For example, I saw a groupon for the barber shop I frequent regularly and pay $16 for a haircut, advertise a groupon with a discount that portrayed its original price for a haircut as $35 when obviously I knew it was a lot less. Not only is this method morally wrong, but it’s unsustainable. Soon, groupon customers will be even more turned off by the site by the mere fact that merchants are lying about their “real” prices and it will rob Groupon of any customer loyalty it currently has. 

  • Schmalex

    Can all new posters and ‘summarisers’ please remember one thing before they submit-noone forces anyone to feature on any group buying site. Many of these posts make it sound like government legislation or drug company price hike debates. All business owners are big enough to make decisions for themselves and providing they are not missold by Groupon, then they are free to try or not to try any promotional campaign they wish.

  • http://profiles.google.com/kdsandeep Sandeep Deshpande

    “When you consider that better than 60 percent of Amazon’s sales come from repeat customers” we have to see how that plays out in Groupon’s case, but I think tracking it will be very tough unlike in Amazon’s case, Groupon needs to come up with something like a google wallet.

  • Anonymous

    These comments miss the point about Groupon’s business model.
    Businesses using Groupon don’t really want to make a sale. Yes, they
    want to sell PRE-PAID vouchers that EXPIRE in a short time frame, but
    they don’t actually want customers to show up at the door. If you
    actually look at what’s on offer at Groupon, it’s usually services that
    can only be offered at a measured pace to a few customers per day (in my
    local area, Groupon appears to specialize in discounts on colonic
    irrigation). Combine this with vouchers that expire within three to six
    months and the end result is that there are going to be a whole lot of
    pre-paid, but unirrigated colons out there where the merchant (and
    Groupon) make a whole lot of money for doing nothing. This is a mug’s
    game for consumers, which they appear to be cottoning onto.

    • Leland

      lol…

    • Justmejustme63

      In most countries Groupon don’t pay until the vouchers are redeemed. That means unredeemed vouchers mean more profit for Groupon. Not one extra cent goes to the merchant.

  • http://blog.sixstringcpa.com Geoffrey

    Hello, I have been writing on the Daily Deal model and potential pitfalls for a bit now. In fact, in August last year I created a financial model to help small business owners run some quick numbers in advance http://www.couponcpa.com so they could get a feel and aid in planning. Then I started a new blog around the same time. I have to say I find it interesting that everyone seems to be asking questions about the industry’s model only now after just one industry participant files an S-1. Truly intriguing to me.

    • Leland

      Thanks for the link Geoffrey. Awesome. :)
      *Edit: Until i noticed it was not free

  • Dmitry Gudkov

    Good article. Two remarks:

    1) Groupon isn’t Ponzi scheme because in Ponzi scheme early participants benefit from late participants. In this case, if Jose is right, neither early nor late participants don’t benefit.

    2) This article is built on assumption that Groupon doesn’t create value for merchants. While this can be almost obvious (especially after so good explanation), it’s still an assumption without confirmed numbers. However number can be obtained relatively easy — just survey Groupon’s merchants about their loyalty to Groupon — how many of them will continue with Groupon? I believe those who are interested in investing in Groupon should cooperate and make such research. Cost of the research is very small price for risk mitigation.

  • http://pulse.yahoo.com/_P7SL2S3RC2ZJR4MHOZICHHYGCY Corsair

    My wife has been a Groupie for a few months now.  We’ve used many of them.  Some have been at businesses where we were already customers – a waste for the merchants.  For businesses where we weren’t already customers, I don’t recall ever going back to any of them — another waste for the merchants.

    This is a sample of one, but I’ll bet the VAST majority of Groupies are just like that — obsessed with getting and bragging about bargains, not on finding good restaurants or retailers.

  • Anonymous

    Jose -

    What else can anyone say?  Utterly brilliant perspectve/premonition of what is invariably yet to come…

  • http://twitter.com/thestreetpundit The Street Pundit

    .
     
    Groupon is essentially the old freebies of web past rolled into a nice package called group buying. But the concept is the same – money for eyeballs. Think Pets.com superbowl ad ( I still have some of those sock puppets still in the original box -!) The similiarities are clear.  For Groupon it is even worse. Drugstore.com and priceline  and the other which managed to still be around today  have brands that actually mean something , that actually are more then just money for eyeballs – so even when the money ( and the eyeballs) disappeared they still had a brand to hold on to. They built something that could be defended, that had a barrier to entry. Groupon has none of the above. It has no brand besides for the fact that it can bring eyeballs to a deal, there is no barrier to entry. So when the money for eyeballs starts slowing down ( as it did in the last bubble) Groupon will lose the gas that fuels its growth. It will no longer be able to exist.
     

    I wrote ( excerpt)  this on Venturingcapital.com in Feb.. The s1 only makes it more clear

    • Leland

      Yes this is correct, there is no underlying stability that will allow the business to continue after initial growth vectors are exhausted. I will happily watch Groupon’s stock tumble. :)

  • Quantella Owens

    Dear Mr. Ferreira,

    Thank you so much for this article. I have been scratching my head in wonderment for awhile now at the fact that Groupon can convince merchants to invite hordes of cheapo customers who aren’t ever going to pay full price or anything close to it into their stores. I think it really speaks to the fact that most Main Street Small Business owners don’t know how to market and are really, really desperate for anything that will get bodies in the door. One problem is the quality of the customer that these types of schemes attract. The other problem is that it sends a bad message, mainly: “I can’t get anyone to shop here and I’m so desperate I’ll pay you to come to my store.” Either way, the end result is that the merchant gets burned every which way they possibly can: by sending a poor impression of their business to the public, by showing their inability to attract customers based on their current story and by settling for cheapo customers who are only walking in the door because of a deep discount. Groupon is a Ponzi scheme …and it’s a very dangerous one.

    Thanks Again,

    Quantella Owens
    Virtuality LLC

    • Anonymous

      Assuming stuff on part of the consumer is what makes most of these arguments invalid. I am a consumer and if you ask me, I would say that I don’t hold back if I see something I like. If I have a groupon for $25 and the stuff costs $50, I dont mind shelling out another $25 on top of the Groupon. If the business can’t put a good product in front of me in the first place, why should I return? I don’t think merchants putting their stores on Groupon are desperate, in fact, I love it because I get great deals. I am by no means a cheap-o, but if it’s there, why not utilize it?

  • tvrobertson

    What you are failing to consider is “breakage”. This is the term used to describe, groupons, gift cards, etc. that are never redeemed or partially redeemed, and it is a very significant percentage of total sales. This is why you see RACKS and RACKS of gift cards at many stores now – the seller gets a fee to market the cards and the breakage element pays the vendor far more than they ever actually redeem in goods/food/services. Consequently, I recommend the universal gift card - cash!! Be well! 

  • http://twitter.com/HolmesPI Rob Holmes

    I agree heavily.  Have been saying the same thing for months now.

  • http://www.mindmagic123.com Hypnosis Los Angeles

    From the comments posted by small business owners who have actually considered or tried this service, they reveal different categories, despite all ideas about how it will hypothetically affect and be considered by them. 1) Considered and rejected. 2) Considered as a possibility. 3) Considered favorably. 4) Tried and found wanting. 5) Tried and found temporarily useful. 6) Tried and loked on as favorable to be continued. Obviously the success or failure in the near future depends on the ratio of these categories. Basically this is a coupon sales discount process, only mass marketed via the new possibilities of the internet, with a huge sales force and high markup. Probably high commission sales, like all the Wall Street financial services bubble. That turned out well!!

  • Kane Deng

    I think there is another big Internet bubble, and more and more social sites want IPOs. Will they make enough money from their businesses in the future?

  • 5ftflirt

    I think it works for restaurants because most people don’t eat dinner at a restaurant alone. They come with friends or dates. So 1 person gets 50% off an inflated dinner menu, but her date/friends pay full price, plus also order wine or drinks, plus people order more because of the perception that some of it is free. And maybe the restaurant gets another regular customer or free word-of-mouth. I think the restaurant comes out ahead.

    Also things like a discount at a yoga center or gym. Once you’ve taken the month or 10 classes or whatever the discount is for, maybe you keep going and buy a membership.

    • Leland

      Or maybe you will walk a half block away to the next yoga center with a 50% discount.

  • Fab

    Two things. First, if as a merchant you’re able to get your client to pay you a 70% margin, I don’t think you need Groupon. Second, about return customers. I was a smoker and up to a couple of years ago the majors used to promote their cigs with buy one get one free type of promotions. I had a two good years of smoking for half the price because I was switching form Marlb to Camel to Winston whenever there was a promotion. All the majors stopped this because almost all smokers were doing the same. This business plan doesn’t work. 

    • Leland

      And I bet the only reason why they started that buy one get one free campaign is because they knew you couldn’t exit the market. Addiction is so abusive… the government should instate special rules in markets dominated by addiction.

  • Macowan2003

    From the very first time I heard of Groupon I felt the same way about its operation. It is unsustainable in the long term, and who suffers ?….the merchants/retailers who buy into the customer loyalty argument.

    • http://twitter.com/Tao_of_Ray Ray

      Most likely the consumers, that’s who it ultimately gets passed on to, unless they go out of business.

      • Leland

        only the loyal consumers. Those who pursue the deals relentlessly will reap maximum benefit from the short-sighted small businesses that choose to use groupon. :)

  • Adf

    One thing about Groupon is that its business model and technology is easily replicated.   I am signed up for about 10 different deal companies now.   They better start buying up some of these if they want to stay significant.    

  • CYNTHIAJACOBSCMT

    GREAT STOCK IS JCO.F IT”S HOT!!!!!!!!!!!!

    MOVE IT OR YOU’LL LOSE IT.

  • Pepeboo5

    How wonderful! The Groupon group saw and learned from the world’s best Ponzi schemers. They witnessed these schemers taking everything they could from their duped followers. In fact, these Ponzi schemers could form Ponzi University where by example and precept they  teach those enrolled how to lie, steal, cheat, betray, and cover it all up.  

    Old PU, offers the following subjects: How to master in duplicity. How to deaden and destroy your conscience. How to master lying, and make it so smooth, and appealing, that  truth telling will be a vice. How to excel in hypocrisy, so you can be a master of deception, and pretense. How to steal, and make it look like a public service. How to swindle, cheat, defraud, enrich yourself, and paint your face with an innocent look as you boast of your glorious sacrifices in public service. 

    This marvellous PU, has the world’s best master teachers, all specialists in the subjects listed above. These teachers take care of themselves. They have power to give themselves a raise, and puffed up with pride they exempt themselves from the rules and decrees they hand down to their subjects. They are too great to fall to the level of the peons.  

    The Master revealer of truth, and the only teacher who perfectly lived His teaching, described the teachers in Ponzi U in these words, “You hypocrites, you fools, you blind guides, who do what you do in order to further your own greed and ambitions. You labor to appear righteous to the people, but within, you are full of hypocrisy and iniquity. You bind taxes, and budens grevious to borne on people, but you will not lift one finger to give them any relief. You labor to make one convert, and when he is made, he is twofold more the child of hell than yourselves. In pretense to cover up your wickedness, you make long speeches, while you secretly deprive widows of their life long earnings, and give it to foreigners who never paid any taxes. And then the model of purity, and self sacrifice said, “You snakes, you vipers, how can you escape the damnation of hell?” 

    Of course you know the location of Ponzi University, and the name of it. It’s real name is,
    “The Congress of the United States of America.” A more deceitful, group of Ponzi schemers has never existed in the history of the world.

    • Leland

      *facepalm*

  • CYNTHIAJACOBSCMT

    GREAT STOCK IS JCOF.  IT’S HOT!!!!! MOVE IT OR YOU’LL LOSE IT

    • Leland

      OMG!!!! GOGOGO!!!

  • http://jigarshah.net/ Jigar Shah

    Do agree with discount…50% is just one time stuff. To get customer for first. But how many of them will be “Loyal” ….? 80% like discounts are only possible in services where very margins are very high…Like restaurants, SPA and beauty treatments….

  • Angry Fat Man

    A coworker wrote this in response to your article:Regardless of consumer referrals to a specific destination, groupon itself gets referred to by consumers and businesses alike.  Small businesses – and big businesses – refer it to others, and consumers use it as well.  It’s also created an installed base of consumers who now use it as a “go to” tool for discounts on some of their favorite local and national goods/services. And it can pay off for merchants, both small and large.  Maybe not all of them, but most.  If I’m a small biz, and I benefit from a short term spike in revenues/business with some longer-term loyalty for some subset of those customers, so be it.  If I get a few regulars who took the deal and I lose a bit on that transaction, so be it.  I’ve a get a bunch of “one-timers” that stimulate revenues/demand temporarily but never return, so be it.  Possible word of mouth from those same customers is an additional benefit, but not the only one I should be expecting from that transaction.  If I can’t figure out the economics of my own business and make a choice that hinders instead of helps, then shame on me.  Groupon isn’t a f*cking charity. Now if he were to claim that “there’s no bubble because markets are efficient, the valuation is fair at the time even if it doesn’t last, and therefore bubbles don’t really exist” I may give some credit.  Or if he said “this is the start of a bubble, one of companies that may have rich immediate cash flows, but no longevity and is therefore a bit the opposite but a bit the same as the last bubble and bubble burst” then my ears might perk a little.  But this guy is talking out of both sides of his mouth.  But this guy – whoever he is – is a f*cking idiot.  On one hand he writes out every characteristic of what a “bubble” is, but then flips around and says “but I’m not saying there’s a bubble”.  He’s highlighting only that what he thought was the core value proposition of Groupon may not necessarily be the current or future value proposition.  But it doesn’t have to be. I take particular issue with this statement: “Groupon management won’t release these numbers, and certainly won’t release thoroughly audited and vetted versions of these numbers. Instead, whatGroupon management is doing is withdrawing an astonishing amount of cash out of the company. It’s also creating a new class of B shares so that it can keep control of the company in the hands of management — all the better to keep the Ponzi scheme going for as long as possible.” This guy really shows how much of an idiot he is here.  How are these actions different than any other start up?  How are they NOT to be expected of a business that has grown as rapidly and as large as Groupon?  Of course they’re protecting their initial investors and do a bit of control centralization in the face of an IPO.  It makes sense.  It’s also the reason they’re onboarding a slew of more-seasoned tech execs and leaders from Google, Amazon, eBay and other places to ensure that they keep the momentum going. He claims that network effects of LinkedIn, Facebook, Twitter, etc are so much stronger.  They might be, at least between people, but Groupon has fundamentally linked people and financial transactions.  This guy’s hyperbolic bullsh*t is irritating.  I know I have some half-in-jest, tongue-in-cheek envy for my buddy there, but I’m actually proud and excited for him.  And I fully admit I have no idea if Groupon will survive or is sustainable.  Sometimes I think so, most times I don’t.  But the reality is I don’t know, and I can have lots of fun speculating but when a putz like this guy puts together some unsubstantiated, ill-thought-through diatribe posed as educated speculation based on his deep expertise, I take issue. You know who this guy is?  He went to Carelton College in MN – a top-notch, but totally liberal institutation in MINNESOTA, the most liberal state in the union next to California.  Sure he went to HBS, but he was also John Kerry’s chief strategist in the 2004 presidential election.  He’s also Teresa Heinz’ nephew.  Not that any of this matters except that I find blueblood liberals to be some of the most out of touch, infuriating, self-righteous yahoos possible. 

    • macrorcim

      Wow “Angry Fat Man”, you sound like a troll or come off like a talking head on a political commentary show, all sad and angry bluster.  Unfortunately it diminishes some valid points that those talking heads usually don’t have that get lost in the Rush Limbaughness of it all. 
      Personal attacks aside, I agree with some of your points.  I think there can be benefits in the short and long run for business of many scales, all depending on how Groupon continues to execute their product and differentiate/segment their channels for small business customers, and channels for larger business customers who have those efficiencies.  We’re already talking about a natural segmentation between large/national (e.g. the Gap thing they did a few months back) vs. small, localized customers with a very finite number of coupons available.  I think understanding the economics of the deal is up to both the merchant and to Groupon, just like it would be up to the merchant if they decide to put a coupon as an insert into a widely-distributed newspaper.

      As a merchant, even a small one, there’s nothing inefficient about using Groupon sporadically to generate peaks of demand if that’s what my business needs dictate, regardless of how heavy my gross margins are or expensive my acquisition costs are at any given time.  I’d position that if I chose to use Groupon once or twice a year – at periods where I had unexpected dips in business that I couldn’t trend for – it simply becomes a promotional lever for me to pull, and Groupon acts as an accessible channel for multiple consumers.  And not all merchants have to use them sustainably, just enough merchants – one time or not – need to keep using them for some period of time.

      I will admit the part of the original post that came as new information (assuming it’s true) is that so much of Groupon’s revenues are remitted post-revenue reporting.  Then again, it’s not all that surprising.  I think calling it a “Ponzi scheme” is a bit harsh.  As far as I understand it, this isn’t a unique situation.  Entire industries like wireless/cell phone carrier and other and cable companies who are – for like of a better term – aggregators of content/access to other companies info – report their revenues in much the same way; they do financial reporting on pre-remittance revenues prior to much of the revenue sharing they may do with the actual content developers/owners.  I get that most of those companies are public so the line items break out the value separately, but I imagine an IPO of Groupon would force the same trasnperancy. 

      But as for now, aren’t they being valued on the total aggregate value they create not just for themselves, but across the value chain?  Is there a fairer way to do this in gearing up for an IPO than the way they are?  I could be wrong, but I thought this was the case and – if so – it begs the question “why try to battle an environment you didn’t establish?” 
      Lastly, I agree that I have no idea if “Web 2.0” will lead to “Bubble Burst 2.0”.  The web itself has evolved, and so have the supporting technologies that give us access to it.  Our entire lives are consumed by connected devices like phones, laptops, tablets, etc, etc that keep us constantly interconnected between every facet of our life.  We’ve happily created this “always on world” and tons of new businesses are rising and falling every day.  10 years ago when the concept of “m-commerce” was young, there were still people out there who didn’t have internet, and dial-up was still the preferred method for those who did. Now we’re in a world where fixed broadband is dominant, mobile broadband is nascent, information is converged and accessible nearly everywhere, and nearly every company large and small has a website (and many have m-commerce support).  Is there another “bubble” to be had like when we were in a world were the ideas were consistently more evolved than the infrastructure or readiness, or are we now keeping a normal pace of innovate/demand/need/innovate?  Just a thought.

      Back to you, ‘Angry Fat Man” – I’d give the friendly recommendation for some “Debate 101″ tactics - a little bit of that Covington we all loved/loathed in high school, perhaps the part about “tools of suggestion” if I remember correctly on hedging back on personal attacks, especially ones that ignore other truths (have you looked at the rest of the blogger’s career?).  And if the beginning part of your email about a “friend writing this” is true, the friend that posted this is an a**hole or not a friend at all, working on the assumption you meant it as a cheeky but private response.   Or you’re just a major blowhard. In short, please learn some debate tactics or find new friends.  :)

      • Leland

        Great post macrorcim. I wish you posted your twitter/blog so that we could exchange info/see more of your ideas. :)

  • Vasya

    Social processes are way more complex, i’m afrais, and way less logical as the article assumes.

    • Leland

      Oh great guru of social commerce, please lay upon us your wisdom in a longer-then-one-sentence comment.

  • http://twitter.com/RobC_White Rob White

    I agree that the Groupon model is not sustainable – not because of it’s merchant model (which, as you point out, has it’s flaws) – but because of the low switching costs for the consumer. What is to stop me switching to the competition? What makes Groupon different from it’s competitors? Groupon has only made headway so far because of it’s ‘first mover’ status but they have not been able to turn that into an advantage for the long-term.
    To me Groupon is very disposable and I suspect that they’ll be in a lot of trouble when Facebook and Google fully roll out their offers who have much stronger competitive advantages is to leverage.Given that Groupon is making a loss and with more competition on the horizon, I do not anticipate a great future… unless they can really make Groupon Now work and leverage exclusive partnerships with other communities such as what we are seeing with Foursquare and Expedia.

  • Beverley

    I am a business consultant for many wellness business (yoga and pilates) and the conversion of groupon clients to ongoing clients is really low (0% to 25%). This article is great — finally someone telling the truth about Groupon.

    • Leland

      Also, as was said previously in this thread, loyal customers are *everything* for that sort of business, and when they see you are giving out a 50% or higher discount for newcomers, they will wonder why they arn’t getting a discount for the same service.

  • Anonymous

    With so many apparent marketing geniuses with time on their hands to post all these comments, I can’t understand why we’re in a sustained recession.

    • Leland

      There about 100 000 clueless people for every person who makes an intelligent comment here.

    • Anonymous

      Totally agree with Steve_O! I also think it’s funny that everyone jumps on the “YEAH Groupon is a ponzi-scheme” bandwagon but offers absolutely no real or plausible alternatives. 

  • http://www.magillreport.com Ken Magill

    You wrote the article I’ve been meaning to write for a while. And you did it better than I would have.

  • Anonymous

    everybody wants to be coupon “gotcha”player.they all want to be slick.It’s the thief and gambler gene at work.Just so they can sit around the lunch table and brag about their catch.mankind sox.

  • Brett

    The Groupon business model is clearly unsustainable.  I spoke with a local restauranteur who basically said: “restaurants can’t survive giving those kinds of discounts. And the customers we get are bargain hunters who rarely return”.  What’s more, the market has been flooded with me-too clones: Dealon, kgbdeals, living social, bloomspot, Restaurant.com, etc. Now bigger players are entering this space, like Opentable’s “spotlight” and Zagat.  As soon as Groupon puts are available, I’m loading up.

  • http://pulse.yahoo.com/_3GWTVPQ7P3BGUI2AN2Q2HDAQCE SOOTHSAYER

    I bought a Toyota Ponzi and it runs really nice. With the Corinthian Leather.

  • Scott Harlan

    Restaurants typically use coupons.  There are a couple that I frequent that have been using coupons for years.  Typically $10 off or buy one get one free up to $10 (but most of the meals are less than $10).  and people use them all the time.  But for that $10 off coupon the couple comes in, buys two dinners, drinks, etc and walks out with a bill of $35-40 rather than $45-50.  Groupon does the same thing but the differnce is that people paid for the coupons ($10 for a $20) so the are much more likely to use them and the vendor gets money iff they are not used.  It is just another form of advertizing that does not cost anything until they are used and actually generate revenue when issued.  I would guess that the model is sustainable in far more instances than the author would like us to believe.  Will the stock be overpriced and implode at some point?  That is a completely different (but related issue)

  • Kurt

    I’m a business owner with two companies. I used Groupon for one campaign each. You are correct, our margin was 25%. Can stay in business at that rate. However, Groupon did get my brand out there and bring in new customers. Our challenge is getting those new customers to come back at 100% margin. So far our repeat customers are in the low 20%.

    Groupon for us is a one shot deal. Worked great but not a long term marketing partner.

    Kurt
    Capelli Enterprises

  • Peter

    To argue Groupon can’t work is to argue 50% off or two for one coupons can’t work over the long term, but as we all know, they do. It is no more complicated than that. 

    • Pete

      Hi Peter, I own a Direct Mail Coupon Company, been here for 26 years, and I want to agree and disagree with you on your comment. Of course offers like 50% off work, but it’s how you do them and at what point the give-away stops and full price kicks in. When we do them, we are careful to use offers so that the giveaway is reasonable but leaves enough room to build the ticket. Even a BOGO leaves room for the drink, desert, a 3rd person (child) to build the ticket average. With Groupon and Living Social doing things like $40 for $20 (Merchant gets around $9 after credit card charges) all those things are included. Sweet deal for the consumer, a really bad deal for the Merchant. Have a great week! Pete

      • Pete

        Oh and let me add, if and when the deals on Groupon and Living Social become reasonable, like direct mail coupons are, their following of Hard Core “It’s too good to be true deals” email subscribers will start to dwindle and die off. I don’t see it working in the long term like direct mail coupons have. Pete

  • http://twitter.com/shanvasm shanvas

    Nice article

  • http://pulse.yahoo.com/_KXDTG7EMJPM35IO5H3KIKTL4RM Johnny Pat

    Groupon’s management is very much aware of your analysis, agrees with its conclusions, and will change the business model to a more traditional coupon paradigm once they have completed their IPO. I also think that once they have established a 20-25 market valuation they will merge with Google or similar company. I would not invest in Groupon but for the speculator that understands the underlying strategy it could be profitable. I personally know at least 3 Chicago merchants who have used Groupon to attract customers, have lost a bundle of money on servicing them and have not seen much of a return. Green Stamps was far better strategy and they disappeared long ago.

  • Olive

    Thank you for removing the blinders off Groupon. There has been so much hype with Groupon being touted as the greatest new business since Wonder bread. I can’t imagine why their business model (.. I use the term loosely) is being shown as the new best program since Wharton business school.

  • april b

    I agree but for a different reason: quality is sub par. This last year I have bought over 14 differffferent groupons. Crummy restauants… a cheapie massage with a chiropractor who makes you come to 2 appointments. Car wash passes not valid in the summer… spa service providers who sell 400 groupns and make you book 4 months out because they sell so many… mail order products with high shipping prices… I once paid 30 dollars to soak in epson salt and nearly went blind… or how about the dental cleaning and at the end a root canal is 2000 dollars… bait n switch merchants love groupon. The three or fun fabulous groupns are not worth the spams every day. Groupon is just another form of junk mail that will

  • Pete

    I would recommend that small businesses use Direct Mail Coupons as a means as attracting new customers instead of Groupon and Living Social. It’s targeted to where repeat customers can expect to come back at regular price (It’s a saturation of selected higher income routes by zone), and everyone gets one in their mailbox (over 85% of the homes receiving the package will open and look through it (compare that with less than 20% of the bargain hunters from Groupon & Living Social) and you don’t have to give the store away to get response that will build your business slowly, the right way!
    I own a Direct Mail Coupon Company That has been servicing the main areas of our city for over 26 years. Most of our customers repeat with us and have been with us years. Guess what?… we have not lost a single one to the Groupon/Living Social Media. We do a fantastic job for our customers and so, why would they switch to a program and get 25cents on the dollar (less than that after they deduct credit card charges)? A few have tried it and learned the hard way. Most said “never again” to that type of approach. One liked it (body wraps, high mark-up and minimal cost) but still uses us monthly and it’s been months since they ran that program. They said they weren’t permitted to run more than every 6 months.  
    One other point I’d like to make is this: To create a quality NEW repeat customer usually takes multiple media exposures and multiple visits to the business itself. If they only come in once with a 50% off , even if they are a quality customer and liked it ( and some are although most are hard core bargain hunters), they are a lot less likely to return and pay full price. The Groupon /LS type media is not something a business can do monthly like with our program to build that marketing consistency.
    Bottom Line: I agree with the article. That type of marketing does not make sense for the business owners (most at least) and will be short lived. I wouldn’t invest my money there…  
    Pete

    • Larry

      Pete, whats the name of the company

      larry

  • Mllamoreux

    This is not surprising considering that the entire corposystem is a Ponzi scheme that can not be sustained and will implode.

  • http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

    Americans today are arrested in their development.  They are still teenagers in logic and behavior.  Joiners.  Group-thinkers.  ANYTHING that appeals to them as new and worthy of joining they will join.  So companies like this get some buzz.   And like other revenue-negative unsustainable businesses before in the dot-com graveyard, this one will join it. 

    One look at the stupid “services” offered most of the time would tell you that this is a pathetic business model.    A woman’s seminar 2 hours away from me at “50% off!”?  Really?   Half off a bed and breakfast stay in a backwater town with nothing going on?   Oh goody.    50% off a “clutter expert” coming to my home to counsel me on my psychological reasons for having a cluttered home?   Seriously? 

    These companies can afford to take just 25% of their “normal” revenue on a customer because right now they are getting 0%!   Nobody uses their bad-idea businesses.   So 25% is better than nothing right now.   But unless Groupon can find an endless supply of these businesses (as the current ones will soon be defunct) they will die too.  Hence it is a Ponzi scheme.

    Note that only rarely with an actual USEFUL service be offered. And even then it is a come-on for continued service. Sign up for the $25 month of lawn service (“worth up to $350!”) and fail to sign a 12 month contract and see if that dude ever shows up again after the first mow. He will lose your number.

  • Doc_ty

    it’s funny how business in totally different fields is much the same.  When I was reading this it reminded me of dental insurance (I’m a dentist).  In order for a dentist to become a contracted provider for a specific dental insurance company he must agree to a lower fee schedule.  The new fees are between 30-70% lower than his usual fees.  Once one dentist in an area becomes a provider, all the other dentists must also or else their patients will go to the provider who has the lower fees.  this makes each procedure a dentist performs less profitable.  In order to make up for the lost revenue, he must lower overhead, or do more procedures.  Most do the latter, which results in faster and usually sloppier work.  Ultimately it hurts the patients the most because their teeth continue to fall apart, and the dentist isn’t happy either because he is forced to work more and faster and sloppier.  The only winner in the group is the insurance company.  I would like to know your thoughts on this doc_ty@hotmail.com  

  • Jeff

    No offense Pete, but there are few things I hate more than direct mail ads/coupons.  It’s snail mail spam.  

    • Pete

      Hi Jeff, I agree and hate spam too, and I sure get a lot of it! As for Direct Mail Coupons,I’ve seen some real junk out there but I think If you seen My package you’d like it. Pete

    • Pete

      Hi Jeff, I agree and hate spam too, and I sure get a lot of it! As for Direct Mail Coupons,I’ve seen some real junk out there but I think If you seen My package you’d like it. Pete

  • Anonymous

    I am writing for a small business who has used groupon.  It was a mistake.  A 75% discount is not workable and full price repeat business generated as been next to nothing.  Oh, well, live and learn.  I certainly would not invest in the company, though.     

    • Pete

      Sorry to hear about your bad experience with Groupon. When we do Direct Mail coupons (I own a Direct Mail Coupon Company, been here for 26 years) we are careful to use offers so that the giveaway is reasonable but leaves enough room to build the ticket. Even a BOGO leaves room for the drink, desert, a 3rd person (child) to build the ticket average. With Groupon and Living Social doing things like $40 for $20 (Merchant gets around $9 after credit card charges) all those things are included. Sweet deal for the consumer, a really bad deal for the Merchant. Like you said, you get wiser by the mistakes you make in life… Good luck out there! Pete

    • Pete

      Sorry to hear about your bad experience with Groupon. When we do Direct Mail coupons (I own a Direct Mail Coupon Company, been here for 26 years) we are careful to use offers so that the giveaway is reasonable but leaves enough room to build the ticket. Even a BOGO leaves room for the drink, desert, a 3rd person (child) to build the ticket average. With Groupon and Living Social doing things like $40 for $20 (Merchant gets around $9 after credit card charges) all those things are included. Sweet deal for the consumer, a really bad deal for the Merchant. Like you said, you get wiser by the mistakes you make in life… Good luck out there! Pete

  • David

    There is no mention here of the breakage factor.Surely as with most gift vouchers (which is what a Groupon purchase essentially represents) there is significant level of breakage i.e. the thing sits in a drawer and is never used or (in states that allow it) it expires. If for instance there is 30% breakage it represents found revenue and the 75% discount comes down to something closer to 60%. Is there any data on average breakage levels?

    • Pete

      From what I heard and read, they brag it’s 20%… If that’s true it would be a break-even for a restaurant. If it’s not, then it’s clearly a loss if the food cost is 30% or more. With Direct Mail Coupons, using the same offers, even at 1/2 the response (we’d probably beat them by a large margin but we don’t suggest such radical offers to actually do a study) we come out profitable, even though the merchant paid for the mailing. And… It’s targeted and every home in their natural marketing area gets one! With that approach, people could come from across town and never come back, so what’s the point if you can’t keep the customers?
       I do own and operate a successful direct mail marketing company and I have 30 years’ experience (26 in this market), so I’d like to think I know what I’m talking about. Hope I answered your question. Pete

      • Anti_fascist_freedom_fighter

        But does groupon give the “breakage” money to the merchant, or pocket it?  On the one hand the merchant doesn’t have to give away its product at a 75% discount, but on the other hand, if Groupon keeps the money for each coupon not submitted, and the merchant doesn’t get that money, it’s discount is still not going to drop to 60%, is it?  I don’t know the answer for that.  Does somebody know? 

  • http://twitter.com/swagner2 swagner2

    Great review of the economics here. We created our own deal of the day app for any e-commerce store to use because the Groupon/Living Social deals were too expensive. Run your own deal with http://adealy.com.

  • Dkbergen

    The most insane thing about this is how people consider Groupon to be a tech company.  Why? Because they have a website?  Avon has a website, and emails people – does that make them a tech firm, too?

    I personally don’t think there is a tech bubble at all.  A social media, bubble maybe, but who cares – it’s only a handful of companies involved in it.  Watch sovereign debt bonds crash globally in a couple of weeks, and there will be no capital for a Groupon IPO anyway.

  • http://twitter.com/wondealscom WonDeals

    Are we missing something quite simple here, though mentioned and yet not fully examined? Traditional customer acquisition models are more expensive than the Groupon model.

    Newspaper advertising, yellow pages and direct mail have all a higher cost and lower return, with the same promise. Do we call these guys Ponzis?
    Groupon Ponzi scheme?Hardly.

    Groupon are helping merchants to invest in people who could become their loyal customers. The better job they do, the higher their returns. Groupon have a fee for this form of advertising but nobody is investing in Groupon by running a deal.

  • Dom

    The issue is churn, the costs of customer acquisition are high, and customers do not make enough repeat purchases to pay off the initial acquisition cost. Because there is so much room to grow Groupon can fuel customer acquisition growth through their strong cash flow (initial customers buying one deal gives them a lot of cash to acquire more, even though the first customers don’t keep buying to cover their whole cost of acquisition). Group buying is a type of deal, not a business model. Check out this infographic for more visual stats about this. http://www.wesoscrewed.com/2011/07/01/groupon-a-ponzi-scheme/

  • http://TonyMichael.com Tony Michael

    This is a great title… for an article with no merit.
    Groupon isn’t doing anything that the Entertainment Book and countless other incentive and coupon companies have been doing for decades.  Entertainment Book started in 1962!

    I find it fascinating when people use the term “Ponzi Scheme” with no real understanding of what it means.

    It is this same uniformed, uneducated thinking that has people believe all network marketing companies are “Ponzi Schemes”.  Despite the fact there are companies like Avon (Over 100 years old, $10 Billion/year in revenue and growing) NuSkin (almost 30 years old, $2 Billion/year, publicly traded) and the list goes on and on.

    A “Ponzi Scheme” follows the model of what Bernie Madoff did.  An unsustainable investment model where there is NO business being transacted, no value exchange, only new “investors” money’s going to previous entrants in to the “scheme”.

    Groupon IS conducting business.  They are helping businesses acquire new customers that represent future potential revenue.  Their business model is not a ponzi scheme at all. 

    I HIGHLY doubt the author has ever owned a business or acquired a customer.
    If they did, they would understand this model. 

    It is unfortunate when people write as “authorities” on topics they have no real understanding of.  Like nearly every business professor that has never owned a business.

    PS: Just read the authors bio…
    - BA in Philosophy
    - Derivatives Trader (cause of our economic collapse)
    - Political Fundraising Strategist
    Sounds about right.

    • John Mateyko

      That is so spot on!

    • JGK

      Yes a misleading title to grab attention but still some interesting points.

    • Ernie Kilgallon

      Groupon is just doing what the rest of America is doing. De-valuing the dollar, and services attached to the note

    • Brad

      Wrong. Entertainment book does not extract 75% of every sale. Like the author says, Groupon is unsustainable.

  • http://twitter.com/writenoreen Noreen Seebacher

    Hi Jose, Great insight. I linked to your post in an analysis of IPOs I just wrote on Investor Uprising (www.investoruprising.com). Here’s the link: http://bit.ly/ja25JK

  • Chaigirl

    Regarding the yoga studio model: Guess who bought the Groupon?  Old yoga students – not new customers.   So my boss simply stopped paying her teachers for Groupon students.  We are usually paid $6 per head. So guess who absorbs the cost? The workers.

    Many teachers are now seeing a 50 percent drop in income.

    And employee morale is at an all-time low.

    But the boss is happy.

  • Mg00

    does anyone knows the groupon tel. number in uk
    I have a problem with them
    keep on email them -they do not reply

  • Jamie LeRoy

    I’ve read through a lot of the comments, and whether or not the business model is ponzi scheme, I can’t comment on. But here’s what I do know. I love buying into discounts on Groupon or Living Social. But now I’m conditioned to always look for the discount. 

    This is especially true for those services that are just a little too expensive. Like yoga classes. A typical yoga class in my neck of the woods is between $10 – $15. With a groupon, that goes down to $3 – $5. That’s a huge savings! Do I care what studio it’s at? Not in the least. 

    So now I’m a completely unloyal customer who won’t even consider a yoga class without a deal. This is what truly is ruining businesses. But it’s a catch 22. If they don’t offer me a groupon, their competitor probably will. 

    So what’s the end game? As a small business, you can’t afford to offer groupons because you worry about creating one-time customers who never make a profit for your business. But if you don’t offer it, you’re losing out on a huge customer base of daily-deal-site conditioned customers like myself. 

    It’s a tough situation for a small business to be in. And because of that ethical dilemma, I would hate daily-deal sites if I owned a small business. But I don’t. And I do love a deal. So I’m going to keep buying into these deals even though I really don’t like the premise of  how it’s corrupting businesses. 

  • http://pulse.yahoo.com/_FYUIEKPZFGPD4MCGXAL5UDQPV4 Derek Christian

    I do own a business.  I know hundreds of others that tun a similiar business.  Out of all the companies I know only 2 have said they would run a groupon again and I think there math is wrong.  The overwhelming response is Groupon sucks.  We are now seeing people post inflated list prices on Groupon of $50 to $60 an hour for a service that should really be 25 – 20 an hour.  I can name 12 companies klilled by Groupon.  Finally look at restuarants.  Early on they were big users of groupons.  Now you rearely see them becuase they figured out they do not pay off.

  • Madmen

    Spot on analysis.

    The thought that Groupon is creating loyal customers through deep discounts is flawed.  What merchants are doing is undermining their value and brand so Groupon can make money from their desperation. 

    Not too mention it is maybe the easiest advertising business model to replicate on Earth.

  • Mayjune

    We are a service based business and ran our first ‘deal’ two months ago.  We are currently  preparing for our next.  Deals can be profitable.  We thought ours out and prepared an offer that was beneficial to the client and to us.  It can be done.  We are able to upsell to many of our clients and have already had repeat and referral business as well.  A little over half of our deals have been redeemed and our numbers show a large profit overall.  Our first deal was with Living Social and we are currently negotiating to decide who our next deal will run with.  I’m sure that we aren’t the only business that had a good experience.

  • Anonymous

    Yipit’s latest research shows 40% of merchants are repeats.

    Groupon is growing gang busters. Our latest research in Ireland shows a 50% month to month revenue increase from July to August.

    I drove home yesterday and a personality was advertising 50% off on chickens for Tesco. Tesco paid the personality up front, then paid the radio station, then gave 50% off and has no idea if the radio ad works.

    A groupon reverses that spend. You spend nothing up front, you get cash up front, you fulfill the offer, okay it is at 75% off not 50%, but you know if it worked. The difference between 50% off and 75% off is the cost of Groupon.

    See http://siftie.wordpress.com/2011/09/09/analyst-firm-blogger-barstool-and-blather-have-one-aspect-of-groupon%E2%80%99s-business-model-dead-wrong/

    For more.

  • Ears

    Groupon is facing an explosive federal lawsuit in Illinois federal court any day now by a “merchant” customer based in Cincinnati, Ohio.  Anyone else picking this up???

  • Heath

    Funny thing is; If Starbucks offered a half off coupon, I’m coming in no matter what. I love their coffee and just cant get that vanilla frapp anywhere else. I am already a loyal customer yes, but would love a groupon to get me in there again on a day I didn’t plan. So here you have myself, as a person who loves Groupon and will use it.

    Get this for an example too;
    A pizza place out by me, had a coupon online for half off the buffet, I’ve heard good things about this place and read reviews. I went in with my coupon, and loved it. Matter of fact I paid full price the next time. They won me over.

    In my opinion, the business that deserves (by customer opinion, like how it should be and already is!) will get the loyal customer. And that means if Groupon helps them, great! The customer loves that part, and the business pays a fee to (attempt, try, lure) a new customer. 

    That pizza place won me, I go there as an occasional outing now. I like to try things, who can blame me for not wanting to pay full price to try something? I say Groupon wins. 

    Though I do see it as a company similar to Worldcom, I hope they do better. (I have slight negativity at the end). That way I can even out my positives, with negatives.

  • guest

    Very late to the punch here, but this article sucks.  a) It’s obvious that Groupon is terrible for the businesses, should Groupon itself actually become successful.  Therefore Groupon itself cannot become successful (they success depends on eating their own customers).  b) Groupon is obviously not a Ponzi scheme.  Pure sensationalism, disappointing.  c) Highlighting the creation of class B shares to retain control is also fairly morally repugnant.  It’s a common activity, done by many many companies.

  • http://profiles.google.com/zenchemical Sean Lamont

    If you currently look on the seattle groupon site, nearly every vendor meets Brian Hirsch’s criterion. This may be what groupon is evolving into – A way to fill sell marginal-cost inventory. I’m not sure that merits its valuation, but there is business there.

  • http://pulse.yahoo.com/_STTAEWKQXBGUTRASEELVBMAMZM PaulR

    One question I have not yet heard:  What happens when (if) Groupon starts failing to attract new business faster than coupon redemptioons.  This could lead them to run out of money, while there are still millions of dollars in coupons left to be redeemed?  In that case, everyone loses.  And it is a possible, even likely, outcome!

    And, although I disagree this is a Ponzi scheme per-se, they are paying earlier merchants with payments collected for later merchants deals.  If future business goes away or fails to grow to match previous needs (or management pays themselves too much by “accident”), the end result is no different than a Ponzi scheme.  So his argument is a valid one, even if technically not 100% accurate, and worth heeding.

  • Andy

    A don’t think I agree that Groupon is a Ponzi scheme, perhaps a very bad investment but not a Madoff-esque Ponzi scheme.

    Generally speaking, I think Groupon represents a very bad deal for most businesses but sometimes in some circumstances can succeed.

    On KGB deals (a Groupon clone) me and my girlfriend bought deals for a gym about 15 miles away for two personal training sessions.  Although I haven’t bought any further training, she has bought a $1300 training package and travels a long way to use it.  Why?  Because the experience was so good she was more than willing to come back at full cost.  The key here is that the service we received was so good.

    Another time we used a Groupon for a high-end salon.  Although we haven’t been back because we can’t afford the high prices, the salon did get two very positive Yelp reviews and positive word of mouth.  For a salon with relatively low marginal cost this might still be worth it.

    Other times I have bought Groupons for businesses I already frequent and in these cases have simply gotten a discount for nothing.

    I have also seen frequent Groupons for an $80 cruise in NYC marked down to $39.  This cruise has terrible reviews (I bought and then canceled the deal after reading these).  I would guess that this cruise is designed to be profitable at the $20 or so Groupon probably pays them.  In this case the business makes money but the customer loses.

    For a Groupon to work it needs to be smartly targeted, well planned and the underlying business must be great.

  • TC

    It is not as simple as 25%….  in many cases, merchant figured out how to make it somehow work… ie  merchant offers 50% for $40 meal… however, the average price per meal may be $100….  so the merchant knowing full well that he is getting $10 (25% of $40) but customer will spend $60 extra… so in the end, customer pays $80 ($20 + $60), groupon gets $10, and mercant gets $70 … it is 30% off, not as bad as 75% off….

    However, i think Groupon, if running into cash crunch situation, would use the money from NEW deal to pay the merchant from previous deal… then it is more and more like a ponzi scheme…   if it goes bust… of course, the last merchant would NOT lose out because it can simply REFUSE to honor the coupon, but the folks buying the last round deal would get nothing….   just like PONZI scheme…

  • http://twitter.com/F1tint Andrew

    #in

  • Lorenzo Bolognini

    I think the main problem is that merchants think this is a way to make money instead of  it just being a new way of advertisement. 

    I think merchants should get better at upselling the coupon by making the customer that walks in to get, say, a discounted bottle of wine someone that walks out with some cheese and ham too.

    Selling is almost always upselling. See GoDaddy!

  • BobPetermon

    I couldn’t agree more and look forward to shorting this stock to take advantage of the scenario. Retailers need consistent traffic and a way to provide value. They would almost be better off giving away certain services and writing them off on a weekly or monthly basis as far as perception, essentially a loss leader. This would of course depend on the long term economic value of a customer, which most retailers are oblivious to in the first place.

  • http://www.indianainsurancehealth.com Indiana Medical Insurance

    Scary stuff. It will be interesting to see where this goes 12 months from now.

  • http://www.digitaldomination.com.au Steve Fitzpatrick

    I absolutely agree and i’d never really considered it as a Ponzi scheme before! What about all the carbon copy businesses too? This type of business has spread like wildfire and many businesses are being burnt by thinking it would be beneficial to their business.

    Some are reporting the initial spike due to the sales, but then an actual month on month downturn as loyal customers drop off due to feeling like the product value is no longer there.

    It feels like 2001/2002 all over again, where the .com bubble is about to burst.

  • http://twitter.com/shellshockuk shelli walsh

    Brilliant article which has exposed the most flawed business model you can pursue. If your USP is to undercut the competition you will not sustain a profitable business. Attracting customers who are just hustling for the latest deal are not the quality long-term customers you want, do you really think they will repeat buy from you? I am pleased that the Groupon is being exposed for what it really is (and not the consumer power crap it pretends to be) The fact that the management are emptying all the cash out of the business tells you what!

  • Globaltrott

    Hey what’s all this twitter about ?
    The world wide web is a platform for all and sundry to use for better or for worse. So is Groupon. Understand the platform and you will figure out the best way to use it to your advantage, as a merchant, consumer or investor. WWW is organic and reinventing it’s potential constantly. So will Groupon. Use it with responsibility and u could master the art of organic growth to meet market trends. Or shy away from it because u could not understand the fluid nature of commerce in the current economic global climate. The choice is yours, ours & mine. Groupon is a platform folks ! Not the 21st centuries bible on commerce. U could play your business model the way u think it will work for you as a merchant. If Groupon as a platform adds value – good for you, if it doesn’t then no need to avail of it. Pretty simple, yeh ! As far as consumers are concerned please do not underestimate their intelligence. Everyone wants a bargain but not at the cost of being ripped off ! Get the drift ? A bargain is one that has met the expectations of the availed for which the availed did not have to put out what the general designated costs might have been expected for the product/service. i.e.
    - I spend all day preparing a meal for you and u show up with my most favorite and most expensive wine and in the happiest of moods. Wow ! That’s a bargain. I won’t mind inviting you again, now will I ? You’ve got a repeat customer.
     
    - I spend all day preparing a meal for you and u show up with my most favorite and most expensive wine but in a fowl and grumpy mood and ruin the evening. Wow ! That’s one thing I did not bargain for – wine or no wine.  This is one unhappy customer, couldn’t be bothered with seconds.
     
    -Bargains are like that. Just because I pay half the price doesn’t mean I did not sweat to earn that half which I am shelling out. Similarly a merchant who is charging half the amount and wants to offload instead of meeting the buyers expectations will find out the difference between attracting vs. serving customers. No customer will take a discounted offer from such a merchant even if it’s free.  No repeat offenders at my cost ( buyers not only come in with cash but primarily their ego, thinking, feeling and willing).
     
    Now Groupons business ethics is another matter. Their product is merely a platform, how they get around creating it is ………well…. a matter that may be debated long and hard as have been so many others that understood that to do any business successfully, one has to have the advantage, create leverage, duplicate it and create synergy. Ethics and morality within it’s model are a personal vision, maker of our karmic wheel.

    Kanikad

  • Stuttgart100

    I CALL THIS “SMOKE & MIRRORS” ADVERTISING.

    WE have done the research for over 100 small businesses that originally advertise, NOT one single company returned to advertise with them.
    1. Promised NEW Consumers . . . they chased other Deals
    2. At the end most businesses were left with less than 20% profit
    3. The initial “Barnstorm” of new clients lasted only for the sale and disrupted their daily operation.
    ________________________________________________________________________

  • Edwardombina

    The business establishment comes to Groupon as a “consultant” to their business or product promotions, by way of “Grand Opening”, “2nd Anniversary Sale”, “Thanksgiving Bonanza”, etc.

    It is not a regular business strategy.

    The price offering given is a “goodwill” price and does not consider “profit” figures.

    We are in a free market economy and we can create lots of interesting business models,especially in a recessionary and fierce competitive environment.

    Edward

  • Shaun

    You have not clue what you are talking about!!! You have an opinion and are well spoken but that does not make you right. This is a great program that works for both the business and the consumer. Just cause it may not work for some people does not make it a bad business and them using there profit to widen their sales team and. Us toner base is the root of all business. Haters will hate and you are clearly one of them. May e learn a bit more then have an objective opinion.

  • Shaun

    Typo’s Danm auto correct lol
    Their business* consumer base*

  • http://profiles.google.com/dariopy Dario Alvarez

    Below IPO level now. It looks like the bubble burst already.

  • Cfine

    I’m sorry, but I disagree… I don’t buy many groupons, but when I have, it’s been a worthwhile purchase for a retailer I may have not known about and led to further business. I see what your saying, but maybe, I am the demographic that groupon is aiming towards… Not “discount seekers” but individuals who want to expand their horizons towards new business…

  • http://www.mydeals.gr Prosfores

    do you guys know if a small business owner can choose a maximum number of coupons to sell per deal? does groupon support this??

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  • Dr Witherington

    Vendors are unaware that Groupon take more than the declared percentage!! If Groupon charge 30% of selling price as a commission. On a £100 deal the Vendor would expect £70 back. But the con is that he gets £53.33 as he has to pay over the VAT from Groupon and the VAT on the 30%. He gets 64% of the income while Groupon get 36% not 30%. The Vendor ends up paying the Vat almost twice!! Good deal for Groupon but not the vendor who has already given away more than 50% to make the original advertised deal. I believe that the Vendors are unaware and Groupon know that that their offer is mis-leading the Vendor.
    With Groupons charge to Vendors from 30%-50% this is netting Groupon 16.6% more than the vendor (retailer) realises. Also they pocket the unredeemed vouchers!!
    This can’t last so becarefull buying Groupon shares. They could plumett when the cat is out of the bag!!

  • http://www.winkslondon.com/ Palma

    Thanks for this, I really liked it. Can’t wait to read more.Definitely given me something to think about.

  • http://www.winkslondon.com/ Palma

    Very interesting. I hadn’t thought of some of these things before. Thanks.

  • http://www.winkslondon.com/ Palma

    Hey,nice post.Well written .Interesting I found this blog by accident. Really glad I did though, I’ll be back from now on.

  • Jssuman

    I strongly believe you are VERY correct in your assessment of Groupon and all of these other Groupon type companies that are jumping on board for a quick buck at the expense of Small Business.
    Unfortunately these Groupon style companies will break the back of a lot of small business’s before they implode themselves.
    I own a small business and at a time of low traffic within my store, I decided to do a Deal Saver that the KC Star now has (Local news paper).
    What was even more upsetting was the fact a person selling this I thought I knew through our church. What hype she did sell!!!
    When it was all done, I told her my experience with this. Extreme cherry pickers (People who only shop ads and deals)
    Her exact words were, “You know, I have heard of instances such as this. People only coming in for the deal, only getting product that is on the deal, and never going back!” What a friend, right!
    I STRONGLY urge any company that has to provide inventory to conduct business, DO NOT DO ANYTHING like this. I lost over 10K in a 3 month time span and feel stupid for not doing the research prior to commitment. (The 10K lost includes inventory, added labor, and supplies)
    Out of the 600 I sold ($15 for $30 worth of product) I have only seen 2 of those customers come back.
    To top it off, I still have customers coming in, 3 months after its expiration date, wanting to redeem at full value and most will make a scene in the store in front of my other customers.
    Here is an example.
    Had a VERY good customer in my store with his son. His son is about 30 years old.
    This other couple came in wanting to redeem at full value after the expiration date. I tried to explain to them that I will redeem at the value they paid. The woman proceeded to use very vulgar language towards me.
    Once she did this, I simply told her it’s expired and they missed out completely. If they have a problem with that, call the KC Star.
    This woman wouldn’t stop cussing me even with more customers coming in, then finally the son of my good customer looked at her and said, “Why don’t you just get the F_ _ K out of here!” She shut up and left,,,lol. Being a professional, this is what I wanted to say to the majority of these customers that the Groupon style deals have created.
    I will never do something like this again!

     

  • http://pulse.yahoo.com/_3KRUTA6V6XUAKIALF6WPCMZSKU Marshall

    Yeah, it really isn’t a Ponzi scheme.  It’s a leverage scheme as noted in the article, and doesn’t really benefit the companies much (usually).  Certain service industries can generally benefit the most (dance studios, massage therapists, personal trainers) since their margins are extremely good.  Beyond the basic outlay at the beginning, all you charge for is time, skill, and the upkeep of the location… no merchandise/material costs.

    But having been part of a studio that tried it, it was as horrible as they said.  A standard retention rate for new clients that’s usually around 33-50% dropped well below 10%.  Very rarely you got people interested in trying new things, but the vast majority were one-and-done bargain hunters (yes, they told us this).  That’s barely sustainable for the best case scenario, and I feel sorry for people who aren’t.  Could it work, sure.  But realistically it harms more than it helps in most cases.

  • Blikki1

    You missed another major exception: businesses that tend to experience peaks and valleys. Groupon offers an opportunity for those businesses to have guaranteed income during periods that may typically be slow for them. There are caps int eh number of vouchers offered, so businesses shouldn’t offer more vouchers than they can afford. I, personally, have also had my personal time change and have allowed some groupons to expire, in which case i can redeem them for the amount paid or I don’t use them at all (so the merchant then experiences only profit). Additionally, I know of several local, small businesses in my area that repeatedly use Groupon, and to their advantage. Many of those customers also come back. The end lesson is that businesses, small ones especially, need to look at all the pros and cons before signing on for these deals. Yes, some of the negative results have been unexpected, and perhaps could not have been predicted, but other surprising results have been positive ones. Good business sense comes from doing you due diligence – don’t blame your bad decision on Groupon, unless they violated the terms of the contract you agreed to when you signed it.

  • Anonymous

    Just a point here.  I don’t think the scenario you’re describing fits the definition of a Ponzi scheme.  In a Ponzi scheme, investors are scammed when existing investors are subsidized by the investments paid in by new investors.  The case you’re describing sounds more like extortion as far as the merchants are concerned.   As for the investors in Groupon itself, that’s not a Ponzi scheme, just a bad stock.

  • duh

    You don’t even know what ‘ponzi scheme’ means.

  • Radzeen

    Using Groupon is better than advertising in local newspaper or TV. It cause tons but it does not means the business message sent to right target market. With Groupon at least you got some client knowing about your business and product along with your cost. They have to move on to other cities because the excitement from the buyer is gone. Groupon is far away from Ponzi Schemes.

  • judy tongco

    hi can i get knewton value chain for primary activities and secondary activities? and its S.W.O.T Analysis i need it for school presentation. thanks