Article: Why Groupon Is Poised For Collapse

Business By jason_kraft Updated 29 Jun 2011 , 10:18pm by KoryAK

jason_kraft Posted 14 Jun 2011 , 3:29pm
post #1 of 65

I just read this interesting article from TechChrunch discussing how Groupon's own business model is unsustainable as well as the damage it can cause to businesses who take out Groupon ads. Groupon tends to be more expensive than other advertising routes while targeting the least desirable customer demographic (bargain hunters), especially for a high-end custom cake shop.

http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

64 replies
SammieB Posted 14 Jun 2011 , 4:04pm
post #2 of 65

I saw this story the other day on TechCrunch too.

http://techcrunch.com/2011/06/09/groupon-single-worst-decision/

AnotherCaker Posted 14 Jun 2011 , 4:05pm
post #3 of 65

The picture of that receipt makes me want to cry. icon_sad.gif

chrissypie Posted 14 Jun 2011 , 4:34pm
post #4 of 65

While I agree that receipt is bad, when I use a groupon, I am often with my three kids, so I have a decent bill in the end. Plus, if I like the place, I will go back. It does give me a chance to try a place I haven't before. I hate how they seem to think bargain hunters are freaks or something. It really is a survival technique when you don't have a lot of money! Of course, not everyone will go with extra people or go back to an establishment, but they may. I don't think Groupon is a bad thing.

Lenette Posted 14 Jun 2011 , 4:45pm
post #5 of 65

It's not that bargain hunters are freaks but honestly how many are going to use a service like ours? I got caught up in something similar here and it was a complete waste. I was so mad at myself. Luckily it cost me far less than Groupon would have.

NONE of these people were truly interested in my product, being a customer or even telling others how good my cakes are; they just wanted what they could get on the cheap. It was dumb on my part. Before I started this business I knew I didn't want to deal with "bargain basement" types when I had a garage sale and someone complained about the price of Gap clothing that still had the tags on them. So, why I did this I do not know!

It reminds me of a suggestion from IndyDebi -- "always add value never discount". See Debi, I do listen! LOL icon_lol.gificon_lol.gif

I have heard one too many bad things about Groupon and other similar programs. It works for some types of businesses but (from what I understand) generally not small, niche ones like a neighborhood cafe or cake shop.

jason_kraft Posted 14 Jun 2011 , 4:54pm
post #6 of 65
Quote:
Originally Posted by chrissypie

I hate how they seem to think bargain hunters are freaks or something. It really is a survival technique when you don't have a lot of money!



There's absolutely nothing wrong with being a bargain hunter, I am one myself for some items (and for others I will pay more for quality). But from a business perspective, if you run a bakery that is focused on quality rather than low cost, you don't really want to target people who don't have a lot of money -- and that's exactly who Groupon targets.

Now you might think that a business focused on low cost would be well served by Groupon, but low cost usually means low margin, and giving up 50% of your top line revenue for advertising exposure is a huge financial hit. There are much better advertising methods out there.

LindaF144a Posted 14 Jun 2011 , 5:02pm
post #7 of 65

Two weeks ago I was in line at my high end salon paying for my haircut. (After 20 years of going to a hole in the wall hair stylist, I wanted a change. So yes, I did choose the highest end salon in my area). There were 4 people in front of me who all obviously had manicures and pedicures. Their cost? $9.00 each. None of them left a tip and none of them made another appointment.

This past week I was at a meeting with my employees. Come to find out said high end salon did a Groupon of $9.00 for pedicure and manicure. They lost a ton of money, did not get a boost in customer clientele, and it will take a year to recoup what they lost. It pays to have friends "in the know". Otherwise I would not have found this out.

I won't be doing Groupon for my cake shop. I don't care if every other shop in town did. This story is one of the many we heard from the local businesses in the area that jumped on the Groupon wagon.

Plus, they give you a manual printout of those that bought the coupon. If they merchant does not find your name and cross you off the list there is nothing stopping you from reprinting the coupon and using it again. A few vendors we talked to found this out the hard way. This process is the same for livingsocial too.

idontknow Posted 14 Jun 2011 , 9:01pm
post #8 of 65

wow, Groupon here in the UK is very different if I've understood the article correctly. There is no loan or any money paid up front to the business. A business signs up to offer a service at a discounted price, say a manicure for $10 instead of RRP $30, client buys offer on Groupon, Groupon takes percentage and business gets the rest. I wonder why it works differently in the US?

jason_kraft Posted 14 Jun 2011 , 9:18pm
post #9 of 65
Quote:
Originally Posted by idontknow

wow, Groupon here in the UK is very different if I've understood the article correctly. There is no loan or any money paid up front to the business. A business signs up to offer a service at a discounted price, say a manicure for $10 instead of RRP $30, client buys offer on Groupon, Groupon takes percentage and business gets the rest. I wonder why it works differently in the US?



The business does get the money up front in the UK as well -- it sees income when it runs the Groupon deal instead of when it actually sells the product or service. If you sell 500 Groupon deals today for $10 manicures, Groupon pays you $2500 ($5000 less their 50% take) up front, you are then on the hook to provide the discounted service to up to 500 people over the following weeks and months.

It's similar to selling a gift card. You recognize revenue for the gift card immediately, but each gift card sale represents a future accrued expense once you sell the gift card holder a product or service. So it is essentially a loan from your customer.

idontknow Posted 14 Jun 2011 , 9:35pm
post #10 of 65

oops sorry, i misunderstood the structure then. thanks for clarifying JK.

As a consumer I am attracted to Groupon offers, but precisely because I wouldn't/couldn't pay 150 for a haircut, so if it's offered at a much cheaper price then i would go for it. this means i just wouldn't go back at full rate.

CakewardHo Posted 14 Jun 2011 , 10:15pm
post #11 of 65

I LOVE Groupons! I have found my hair stylist, went skydiving (something I always wanted to do) and taken 3 classes at SweetWise with Groupons. I have only had a bad experience with a few. One was a restaurant that treated us like we were second-class citizens. The server was RUDE the food was burned and horrible and I will never darken their door again. I had a not so great experience with "The Cupcake Nazi" store--I won't name any names, but I was wanting to try some of their uncommon flavors. A friend of mine got the same Groupon and was treated VERY rudely by the bakery--even thought she ordered ahead. They had 2 locations, with one being near my house and the other way on the other side of town. I went to order the cupcakes at the location near my home and they just basically folded up their "tent" and moved out. I think Groupon got so many complaints that they refunded the money to those who bought it planing on going to that location. On the sky diving one, but we were kind of treated like cattle and were scheduled to jump at 2:00 and didn't get on the plane until 6:30 (I figured that company did not really expect a lot of repeat business, mostly people who wanted to try it once). They were extremely disorganized.

I think the purpose of Groupons are for a business to put their best foot forward and get new business. I don't know if these businesses have become jaded by people not tipping (I way over tip if the service is good) or what, but I have been pretty much pleased with the businesses that treat me like I am a full paying customer and it is likely that I will return.

If I were a storefront bakery, I would NOT do it because people do not read the fine print. As in the case of the cupcake store mentioned above. They only make enough cupcakes to make it through a day or two and they had so many complaints about people wanting to walk into the store and get their cupcakes without pre-ordering (it CLEARLY said on the Groupon order 24 hours ahead and you can get 3 each of 4 flavors). And people who did pre-order got mad because they could only get 4 flavors. I think my friend got treated rudely because of Groupon "backlash"--they had gotten so many complaints that I think the Groupon actually hurt their reputation because people did not read the fine print. If I had a walk-in business with perishable items NOT made to order I would definitely not do a Groupon. If you offer classes and supplies like SweetWise, I think you make your money back in purchases after and before the class--even though they have pretty much everything you can borrow except the cake.

I may be a Groupon addict...

laurajayne Posted 15 Jun 2011 , 7:45am
post #12 of 65
Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by idontknow

wow, Groupon here in the UK is very different if I've understood the article correctly. There is no loan or any money paid up front to the business. A business signs up to offer a service at a discounted price, say a manicure for $10 instead of RRP $30, client buys offer on Groupon, Groupon takes percentage and business gets the rest. I wonder why it works differently in the US?


The business does get the money up front in the UK as well -- it sees income when it runs the Groupon deal instead of when it actually sells the product or service. If you sell 500 Groupon deals today for $10 manicures, Groupon pays you $2500 ($5000 less their 50% take) up front, you are then on the hook to provide the discounted service to up to 500 people over the following weeks and months.

It's similar to selling a gift card. You recognize revenue for the gift card immediately, but each gift card sale represents a future accrued expense once you sell the gift card holder a product or service. So it is essentially a loan from your customer.





I am a UK based baker, and have used Groupon here; and no, we don't get the money up front.

Once the Groupon has closed, the voucher holders start contacting you and booking - we then take their voucher secuirty number, and feed it into a webform.

Each day, we are emailed a statement of how many have been redeemed that day, and the money is transferred into your account. If someone doesn't redeem their voucher, then Groupon keeps 100% of their payment, as we can't claim it. So the set up is very different over here than in the states.

dchockeyguy Posted 15 Jun 2011 , 2:03pm
post #13 of 65

We used Living Social (as opposed to Groupon) for our Cake Show this year. Living Social is based in DC, where I am, and they love cake things. They were really helpful for us.

We had a HUGE success using them this year. While we offered basically 2 for 1 admission, people came and bought everything pretty much from our bake sale, which turned it's biggest profit ever. One vendor at the show completely sold out of all their fondant. Others were doing a brisk business as well.

I think, depending on what you're doing, it's a great item.

jason_kraft Posted 15 Jun 2011 , 2:50pm
post #14 of 65
Quote:
Originally Posted by dchockeyguy

We used Living Social (as opposed to Groupon) for our Cake Show this year. Living Social is based in DC, where I am, and they love cake things. They were really helpful for us.

We had a HUGE success using them this year. While we offered basically 2 for 1 admission, people came and bought everything pretty much from our bake sale, which turned it's biggest profit ever. One vendor at the show completely sold out of all their fondant. Others were doing a brisk business as well.

I think, depending on what you're doing, it's a great item.



It probably boils down to the proportion of fixed costs to variable costs in the product being offered - the lower the variable costs, the more successful you will be with this kind of promotion.

For example, a ticket to an event or an online software download has virtually zero variable cost (the cost of printing the ticket, and the cost of the bandwidth to download the file), it is all fixed - the cost of putting on the event doesn't change if one more person buys a ticket, and the cost of developing software is the same regardless of how many people download it.

Cake, on the other hand, is mostly variable cost (ingredients and labor) with a relatively small fixed cost component (monthly rent, insurance). Each additional product incurs significant added costs, and that's why Groupon fails so spectacularly here.

dchockeyguy Posted 15 Jun 2011 , 4:07pm
post #15 of 65

I think Margin is really what affects this, from an economic sense. Lower margin items probably won't do so well and feed into the article. Items with a high margin, or ones that aren't really looking for repeat customers, will do much better. I think that's part of the flaw of this article is it doesn't account for enough different situations. I did, however, see Groupon had an IPO (or is thinking of one), and I would be running far away from that.

addietx Posted 15 Jun 2011 , 4:44pm
post #16 of 65

On which page is the receipt posted?

jason_kraft Posted 15 Jun 2011 , 4:46pm
post #17 of 65
Quote:
Originally Posted by addietx

On which page is the receipt posted?



A picture of the receipt is in the article I linked, here it is again:
Image[/img]

addietx Posted 15 Jun 2011 , 5:08pm
post #18 of 65

I don't understand. Did she say the value of the Groupon was $13? Why was $15 subtracted? I am so sorry for her. She says the average purchase before she accepted Groupon was $5 but then accepted a $13 Groupon promotion. I don't know how she is still in business.

WykdGud Posted 15 Jun 2011 , 5:12pm
post #19 of 65

I know of at least 2 bakers who have had great success with Groupon (or similar). I know that as soon as I get my retail doors open, I'm going to be signing up myself. The problem most people have is that they don't think their offers through well enough.

A salon shouldn't offer a single manicure/pedicure - they should offer a 2 for one deal that gets two people in the door instead of one. A bakery should offer a cookie bouquet or small cake that will likely be given to someone else so that more than a single person will get to experience your products or service.

Saying that everyone who uses Groupon on coupons is a cheapskate is a ridiculous statement. Sure there are the cheapskates, but there are also those (like me) who have plenty of money, but are leary about spending it at places we've never been. I hate throwing my money away on bad food, so I'm more likely to try out a new place if I have a coupon. If I like it, I will most definitely be back.

The best offers are small ones - say offering a $30 6" cake or cookie bouquet for $15. You'll only make $7.50 on it, but that should just about cover your ingredients, so you are almost getting a bunch of free advertising. Truth be told, even when I don't take advantage of a Groupon, they are still advertising to me because I am now aware of businesses in my area that I would have never known were there otherwise.

Groupon is a great tool if used wisely. But much like everything else, if you are greedy or don't think it through, of course it could backfire on you.

jason_kraft Posted 15 Jun 2011 , 5:21pm
post #20 of 65
Quote:
Originally Posted by WykdGud

Saying that everyone who uses Groupon on coupons is a cheapskate is a ridiculous statement.



You're right that this is a ridiculous statement, which is why no one in this thread has made that statement (this is called the straw man fallacy). Saying that a business targets a specific market is not the same thing as saying that everyone who frequents said business is in that market.

Around here we rely on Yelp to check out new businesses, since they provide independent reviews. It's been my experience when looking at Groupon and similar deals that the businesses featured often have low ratings on Yelp and are probably turning to Groupon as an act of desperation.

Of course, if you're just starting out it might be a good way to build buzz, and I completely agree that it's critical to work out the right Groupon deal that fits your business and won't cost you too much.

addietx Posted 15 Jun 2011 , 5:29pm
post #21 of 65

She admits she had not ever used Groupon and she did not do her research. It could have been to her benefit perhaps. She is a small business and it sounds like she wanted it to stay that way but after the fact.

kristiemarie Posted 15 Jun 2011 , 5:57pm
post #22 of 65

Groupon is not meant to have customers who already visit you spend money. It's to entice customers who have otherwise NOT tried you to come in. That initial visit might not get you anything but a repeat visit without a Groupon does.

WykdGud Posted 15 Jun 2011 , 6:07pm
post #23 of 65
Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by WykdGud

Saying that everyone who uses Groupon on coupons is a cheapskate is a ridiculous statement.


You're right that this is a ridiculous statement, which is why no one in this thread has made that statement (this is called the straw man fallacy).




Where did I say someone in this thread said that? I was referring to the sentiment in general that Groupon users are cheap and are only looking for a one-time deal, when in fact, I'm sure most of them would gladly come back to a business if they liked the service/product.

*yawn*

jason_kraft Posted 15 Jun 2011 , 6:12pm
post #24 of 65
Quote:
Originally Posted by WykdGud

I'm sure most of them would gladly come back to a business if they liked the service/product.



Yep, next time there's another coupon. icon_wink.gif

WykdGud Posted 15 Jun 2011 , 6:15pm
post #25 of 65
Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by WykdGud

I'm sure most of them would gladly come back to a business if they liked the service/product.


Yep, next time there's another coupon. icon_wink.gif




I find it odd that you are arguing both sides just to be contrary...

Either you think it's a ridiculous statement that Groupon users are ONLY out for a cheap deal, or you agree with it. Which is it?

jason_kraft Posted 15 Jun 2011 , 6:21pm
post #26 of 65
Quote:
Originally Posted by WykdGud

Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by WykdGud

I'm sure most of them would gladly come back to a business if they liked the service/product.


Yep, next time there's another coupon. icon_wink.gif



I find it odd that you are arguing both sides just to be contrary...

Either you think it's a ridiculous statement that Groupon users are ONLY out for a cheap deal, or you agree with it. Which is it?



False dichotomy fallacy.

I believe Groupon users in general are only out for a cheap deal. I'm sure some Groupon users do come back to pay full price, but they are probably in the minority -- it's pretty clear which market Groupon is targeting.

Also re my last statement:
http://en.wikipedia.org/wiki/Tongue-in-cheek

jason_kraft Posted 15 Jun 2011 , 6:23pm
post #27 of 65

Groupon's own research indicates that only 22% of people who use Groupon at a business will turn into repeat customers.

Source:
http://online.wsj.com/article/SB10001424052748703447004575449453225928136.html?mod=WSJ_article_MoreIn_Tech

Jenniferkay Posted 15 Jun 2011 , 6:24pm
post #28 of 65

Living Social called me a few months ago about offering a deal. I passed. I didn't think I would be able to keep up with demand and I'd hate myself in the end.

This is a scary article. Kind of like a robbing Peter to pay Paul thing.

The Groupons that I've bought are for places I frequent or have heard good things about. I'm just that type of shopper.

WykdGud Posted 15 Jun 2011 , 6:51pm
post #29 of 65

The likely reason most people don't become repeat customers may be that the product/service sucked to begin with (hence the need to drag people in the doors), or the business was too overwhelmed with new customers that the product/service suffered due to the unexpected increase in volume. And even IF "only" 22% became repeat customers, that's 22% more than the business had before and that 22% is now paying full price - and likely introducing your business to others via word of mouth.

If you read the articles and do ALL of the research (and not just pick facts here and there), you will surely see that there is a definite correlation.

If a prudent business owner does the proper research and structures the right deal, I don't see much chance for failure.

jason_kraft Posted 15 Jun 2011 , 7:42pm
post #30 of 65
Quote:
Originally Posted by WykdGud

If you read the articles and do ALL of the research (and not just pick facts here and there), you will surely see that there is a definite correlation.



I would be interested in reading some of the articles that you used to research Groupon, can you link some of them? Also, which correlation are referring to?

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