The Wild Wild Web

Why Groupon is a bad deal for the small businesses it claims to help

photo: yoshinari /

I was talking to a friend who owns a very successful restaurant and asked him why he doesn’t offer Groupons – those deeply discounted deals or special coupons from the Chicago-based company that started the whole “deal of the day” craze.

“Because I don’t have to. We have plenty of business at full price, so why should we give stuff away? Plus, it cheapens our brand,” he said matter-of-factly.

I hear those reasons from a lot of successful businesses as to why they don’t offer Groupons, but what about new businesses trying to increase awareness of their existence, or established businesses not getting as many customers as they want or need? Well, it turns out Groupon isn’t such a great deal for
them, either.

Groupon (and other daily deal sites like Living Social) have a simple concept. Say you have a nail salon and you want to increase your foot traffic. You would offer a Groupon for $30 worth of services for $15 – and you pay Groupon half of that $15, meaning you walk away with $7.50. Maybe it’s worth it to you to do $30 worth of work for $7.50 to bring in new clientele; however, many businesses say the customers don’t return. Even worse, many of the Groupon users are regulars who would have paid full price if it weren’t for that great deal they found in their
e-mail in-box.

In an Aug. 17, 2012 article in The New York Times, Dyer Price, owner of Muddy’s Coffeehouse in Portland, Ore., said they offered $24 of food and coffee for $12 through a Groupon. They paid Groupon $6 of that. Price said the Groupon did bring in the crowds they were hoping for, but they wound up losing money.

“I pretty much had to take a loan out to cover the loss, or we would have probably had to close,” Price told the Times. “They don’t warn you that you’re going to get hit really hard and that you have to be prepared. We will never, ever
do it again.”
Perhaps the most famous disaster story is the one about the baker forced to make over 100,000 cupcakes. Rachel Brown, who has owned Need a Cake bakery in London, England, for 25 years, offered a Groupon for $40 worth of cupcakes for just $10 — 8,500 people signed up for the deal and bargain hunters swarmed her shop. Brown had to hire extra workers and lost nearly $3 per batch, which came to nearly $20,000 total.

“Without doubt, it was my worst ever business decision,” Brown told the BBC. “We had thousands of orders pouring in that really we hadn’t expected to have. A much larger company would have difficulty coping.”

She also told the Telegraph newspaper, “We are still working to make up the lost money, and will not be doing this again.”

A recent survey of about 115 merchants showed a similar pattern: Groupon deals may bring in a lot of buyers, but those buyers tend to spend less than full-price customers and not come back. Merchants also don’t like the 50 percent commission Groupon takes from the already deeply discounted deals. Only 4 percent of merchants said their take from a Groupon was “highly profitable,” while nearly 40 percent said it was “slightly/modestly profitable,” 26 percent “broke even” and – most shocking of all – 32 percent lost money.

There are also signs of serious “deal fatigue,” raising questions about whether or not Groupon’s business model is sustainable. According to industry researcher Daily Deal Media, nearly 800 daily deal sites shut down during the last six months of 2011. When Groupon reported second-quarter results in August, active customers (people who purchased a Groupon deal in the last year) grew just 3 percent, a huge slowdown from the previous quarter-to-quarter growth rates.

But it is Groupon’s stock that may be the most deeply discounted offer out there: shares have fallen over 80 percent since its initial public offering last November. Groupon is currently valued at around $3 billion – still absurd when you consider its poor performance, but less than half of what Google offered to pay for the company in 2010.

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