Groupon’s Success Disaster

There’s a fascinating essay on Facebook just now from the owner of the lovely Posie’s Cafe in Portland, OR about how Groupon nearly bankrupted her business.

The coffee shop proprietor, Jessie Burke, was shocked at how much money the daily deals site charged to run the promotion. Groupon sold consumers a $13 Posie’s credit for $6, and then sought to keep the entire $6. Eventually, Posie’s and Groupon agreed on a 50% cut: Groupon would get $3 and Posie’s would get $3. Groupon’s $3 was almost pure profit, but the cafe had to use its remaining $3 to cover the costs of $13 worth of cookies and coffee.

Is it any surprise the promotion was a smash? Over 1,000 customers used the promotion, but the cost imposed by those customers resulted in disastrous losses:

"After three months of Groupon’s coming through the door, I started to see the results really hurting us financially. There came a time when we literally couldn’t not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising."

The losses would have been worthwhile if the Groupon customers had become loyal, profitable patrons but many only cared about a discount, not about what made the cafe special:

"Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers…customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces or who tipped based on what they owed."

This is a lesson with which Redfin is very familiar. We’ve learned through our own painful experience to think like a shop-keeper rather than a web entrepreneur, focusing on happy, profitable customers rather than growth at any cost: if you don’t make money on the first widget, stop making widgets.

We’ve also learned that the customers you attract only with a discount will disregard what you love about your own business, and won’t treat you with respect; both sides usually regret the transaction.

As the grandmother of our VP of Engineering, Sasha Aickin, once said:

"When you buy something cheap and bad, the best you’re going to feel about it is when you buy it. When you buy something expensive and good, the worst you’re going to feel about it is when you buy it."

This is why Redfin’s goal has always been to use technology to make real estate better, not just cheaper.

And finally we’ve learned to be wary of fancy approaches to advertising return on investment. Whenever I hear a Groupon-type pitch — the old advertising saw about the lifetime value of a customer — I assume what they’re selling in some small but important way defies common sense.

The world has lavished praise on Groupon’s business model and for good reason: it’s one of the fastest-growing companies on the web. The challenge with the model isn’t making money for Groupon, but making money for its customers, the recession-pinched merchants giving away their coffee at a loss.

Building sustainable partnerships with low-margin small businesses is hard; it probably involves some level of shared risk, with pricing based on long-term profits rather than short-term revenues. Groupon can do this, but first it has to try.

Discussion

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  • Hdhospitality

    We are also a coffeeshop that used Groupon. Unlike others we studied and decided that the best way to use Groupon was to make it for a very specific buyer – fresh roasted coffee bean buyers. This way we only attracted those customers that knew a good deal when they saw one and eliminated those who just wanted a “freebie”. We only sold 165 but have found 80% of those that bought were new customers who had never been in the store and out of those, 20% have been back in to buy more beans! I think it is important to study your market and tie in your promotion with what is truly important to you – your specialty!

    • http://www.ishiboo.com/~nirva/ Danny Dulai

      You were clearly more intelligent about this.

      Groupon will continue get bad publicity unless it teaches its sales people to not allow their customers to make bad deals.

      1) she shouldn't have given away her cash cow
      2) she should have driven customers to buy something that she could
      still have made money on
      3) she should have driven customers to buy a side product, so they could become future customers of the main product

      This was just a badly aligned Groupon sale.

    • Johnkucik

      Congrats! You know your bottom line and your customers most small business owners are not that marketing savvy they have to work daily just to get by.

    • Akdeyerle

      I own a restaurant in Richmond Va. Our groupon went on sale today. I hope the advice I got on this blog helps make it a success.

    • groupon is stealing our money

      We are a “groupon store” and groupon does not pay the stores at the time they sell the groupon. You only get paid when someone “redeems” the groupon. Then groupon is suppose to pay you every 2 weeks. Well, here is what really is happening.

      We have “redeemed” customer groupons but groupon is unable to keep up with timely payments. Our first payment was promised, but never received. A week later they promised they really had sent it this time and a week after that we finally received the payment. Now its been 3 weeks since we received the last payment. We were again promised – this time that it had been overnighted to us. Well, no tracking number was provided and no check ever came. I have sent multiple emails that have gone without a response.

      I also inquired as to what happens to our money if the customer never redeems the groupon – and guess what – they said they keep the money. This is not disclosed to the customer anywhere on groupon's site. Why should they keep the money? The customer bought our product.

      Groupon is not all that people say and they are just keeping our money.

      • Zzidan505

        I agree, I had a similar experience with my families restaurant in NY, (not the city wayyy out on long island) and the groupon deal did not pay off,
        thats why i think its important to make other small business owners aware of the way groupon operates and let consumers know that these discounts are often less than fair to the retailers
        like the fb page, http://on.fb.me/antigrouponmov… , so we can bring groupons ugly truth to the forefront

  • Daniel Nicolas

    I agree with the comment above. You have to target discounts on a product bought by the demographic most likely to return.

    This is true with nearly any promotion in which the goal is repeat customers.

  • fields

    If you can only attract new customers with a discount, your prices are too high.

    • Melvin Ram

      Strongly disagree. If you can only attract new customers with a discount, your message is off.

      • Justin

        The smarter coupons seem to be the ones that guarantee more money being spent. For example, I bought a coupon to a renfair, and once inside I had to spend money to eat, to play games, and I tipped the performers. I'm sure they made money off of me on the whole.

      • Derek

        I agree with Melvin. It's possible that prices are too high, but that is rarely the real problem in a service business. Usually it's poor location, poor marketing, poor service, or a combination.

      • Sandokel

        I don't know about that. If prospective customers can't see the value in your product or service they will likely not value you or your business. Deals don't equal brand/business loyalty.

        • Keith

          What if there is no value in your product or service. What if the only people to see value in your business are you and the greedy Groupon sales person. What if the reason customers are not returning is because of poor service, poor quality or just a poorly run business. Many businesses fail because they're just poor at what they do.

      • http://29thfloor.com 29thfloor

        Strongly disagree. If you can only attract new customers with a discount, you're not leveraging your synergy.

        • http://twitter.com/csl_ Carl S. Lange

          I think that if you can only attract new customers with a discount, you're clearly not shifting enough paradigms.

        • http://www.yamaha660grizzly.com/ Dokemion

          Absolutely true. How can you leverage your synergy if giving a discount is only your strategy?

          • That one guy

            You have to use the flying buttress approach when leveraging synergy; otherwise the Morpheus syndrome ensues and your ROI will suffer.

      • fields

        Personally speaking, I've purchased a few groupon offers, and they've mostly been for local services (specifically restaurants) that I think are normally overpriced for what they offer. At the groupon prices, they're a good deal. If they're somehow expecting me to pay their normal prices (with the same frequency) after I've used up all of the groupons, they're probably mistaken. This has nothing to do with message, and everything to do with how much I think their product is actually worth.

        • stickyc

          “This has nothing to do with message, and everything to do with how much I think their product is actually worth.”

          On what basis did you calculate the value of their product? What would help increase your estimation of the value of their product? Flavor? Service? Location? Hospitality? All part of the message. Even if you don't want to put them in a venn diagram on a powerpoint slide titled “MESSAGE”, failing to consider those as part of your company's message is a potentially fatal mistake.

          The other point that's not mentioned is that “coupons” on your primary product tend to cheapen it's value to a consumer. The message inherits “if they're able to still make a profit charging X less, it must actually only cost them <x (fresh=”" (unless=”" a=”" anyway=”" as=”" be=”" beans)=”" damaging=”" expect=”" far=”" folks=”" is=”" it=”" it's=”" items=”" leader,=”" less=”" loss=”" make”=”" marked=”" more=”" of=”" people=”" perception.=”" roasted=”" such).=”" targeting=”" that=”" think=”" to=”" tremendously=”" unquestionably=”" up=”" value=”" vertical=”" won't=”" your=”"></x>

          • Baker in da Burgh'

            Im a retail baker in Pittsburgh that ran our groupon yesterday. Firstly I can tell you that Groupon was very up front in explaining their take of the final revenue. We had to initial it and sign it etc. Through some bizarre series of events they could breech the contract and keep it all, but that is not remotely what I expect or they have led me to believe they would do. As far as the return, in our market a half page ad in a well circulated high end magazine is $1800. My feeling was if the whole ordeal cost me that much net, it was still an effective advertising opportunity. Bottom line, we reached over 100K eyeballs yesterday, saw our web traffic increase 842% and of the 374 people that bought the deal, $40 of cake for $20, all have upsold to a more expensive cake and applied their $40 credit to that. Knowing most of my customers by name, I can also identify 246 names that I do not know. That means a new customer to interact with, to include on my constant contact mailing list and to try and convert into a repeate customer. Today I got a few comments from those that did not see the ad yesterday. Most have been along the lines of “wow how cool that you were a groupon” so there is the abstract brand enhancement that comes along with all of it too.

            As for the example above, if she is in a coffee shop and her cost of goods are that high that $3.00 worth of coffee and cookie that retails at $13.00 put her upside down is crazy. Its not like her staff had to come in specially for groupon so her labor didnt change nor did she turn on the lights, the gas, the water etc. just because she had groupon customers. Really all you lose is the cost of goods. I'll show my cards…… the bowl cost on a $40.00 cakes is $1.42. Its the labor that costs so much and they are salaried so if I get $10.00 instead of $40.00 its fine by me. A saavy business owner would arrange their groupon accordingly.

          • http://twitter.com/mcgarty mcgarty

            On the topic of cost of goods sold for a cafe, Seattle Coffee Works recently wrote a interesting blog post about the true impact of rising whole-bean on coffee drinks. http://blog.seattlecoffeeworks.com/blog/2010/09/16/coffee-price-deja-vu/

          • Johnkucik

            You are correct it depends on your cost of goods. Obviously the traffic to your web site was mostly worthless as so few people bought your Groupoon deal

          • http://twitter.com/mcgarty mcgarty

            Evan Miller did a good job summarizing the economics of Groupon with his Golden Football post: http://www.evanmiller.org/golden-football.html

            There is a small football-shaped area outside the normal supply and demand curve where the business is profitable and the buyer is happy. If you can land in that area you're golden otherwise the business loses money and customers are not happy.

          • fields

            On what basis did you calculate the value of their product? What would help increase your estimation of the value of their product?

            This judgement is made almost exclusively on the quality of the food. I'm an excellent cook, and I have a pretty good idea of what it costs to source ingredients and how much effort goes into cooking them well. I'm willing to pay for that to be executed with skill – i.e.: high quality food. I don't care too much about decor or whether the service is good, with respect to price (though those factors will likely influence whether I go back).

            The “message” is how the product is presented, not the actual product itself.

          • Rick

            “I'm an excellent cook, and I have a pretty good idea of what it costs to source ingredients and how much effort goes into cooking them well. I'm willing to pay for that to be executed with skill – i.e.: high quality food. I don't care too much about decor or whether the service is good”

            A bit shortsighted I would say. Obviously, you have never owned or managed a restaurant.

          • fields

            Obviously, you have never owned or managed a restaurant.

            That's likely to be the case for almost all of your customers. If you're going to discount their opinion because they're not food service professionals, who's the shortsighted one? The customers are the ones judging whether your restaurant is a good value, not you.

            Also, it would help if you listen to everything I said. I didn't say I don't care about those things, only that they don't influence whether I think the restaurant is overpriced or not. Even if the service is really really good, I'm still going to feel ripped off if the food isn't up to par for what I paid for it.

          • Guest

            The message is a medium rare steak?

        • http://anEclecticMind.com Maria

          While I don't think you're RIGHT to feel that way, I know that many, many people would feel that way. By deeply discounting products and services, businesses are, in effect, lowering the perceived value of their products and services. The retail price is $50 but with a Groupon, it's only $25. Why the hell would you ever pay $50 for it in the future? And, meanwhile, the business is only getting $12.50 for that $50 item! Only a business with huge margins can absorb that kind of discount.

          This is where Groupon fails small businesses and why small businesses should be leery of using it as this coffee shop did. The idea of a precisely targeted Groupon — like the whole bean coffee someone else in these comments mentioned — might work. But the Groupon user, in general, is a bargain hunter who isn't interested in paying full price. I'm not interested in attracting those kinds of customers to my business.

          • fields

            I see what you're saying, but at $50, I wasn't going to be a customer anyway – I think it's overpriced for what I'm getting. At least with the discount, the restaurant gets me in the door, I'm probably bringing other people, we're ordering drinks, maybe I'll find something on the menu that I can't live without, etc… Without the discount, they won't even get the chance to try again. (To be clear, these are actually all restaurants I've eaten at before, and concluded that I probably wouldn't go back again, because I thought they were overpriced. That more than one of them have shown up on Groupon suggests that maybe they know this.)

          • Phil

            Hence they are attracting a customer who would never pay full price – OR will potentially never come back. At $37.50 per customer, that's an expensive marketing strategy based on the assumption that getting someone in the door “might” make them come back. Which clearly is not the case here, since you considered the restaurant overpriced in the first place.

            Bottom Line: Restaurants are turning their services into department stores, when do you go clothes shopping? When there is a sale, or a coupon is offered.

  • Piper

    While I really feel for all small business owners and their struggles, the business person in me sees this not as Groupon's problem but Posie's Cafe. They new the terms going in and their blog post about it seems to be nothing more than blaming Groupon for their bad business decisions. She even admit's that she didn't listen to her husband's advice when entering into the arrangement. As Hdhospitality's comment above shows, if you understand marketing you can get a great ROI with a Groupon deal, but when you enter into an agreement to give out free food with no limits on it, sorry to say, you really are going to get what you deserve.

    • http://blog.redfin.com GlennKelman

      I just think that if most of your customers regret working with you, long-term you have a problem…

      • http://www.domainnameguide.org/ domain name guide

        I agree with that wholeheartedly. I've always been of that belief.

    • Johnkucik

      You have to factor in the sales tactics in order to understand a merchants mistake in doing a Groupon deal. People who use coupons use coupons and the likely hood of getting them to pay full price after buying at full price are slim to none. They have a great sales pitch and are relentless I know because they tried to sell me I was smart enough to say HELL no/

  • geoff

    The merchant over extended herself. Her problem. If you don't understand your own business well enough to fathom the far reaching effects of the promotion you are about to run, then you deserve to go bankrupt.

    • Hominidx

      The point of it is that it also impacts how Groupon is perceived and run as a business.

      But hey, keep on with being the Voice of Tough Love!

    • Shively

      “…then you deserve to go bankrupt.” Wow, such empathy and understanding.

      I have made many mistakes in business (and life), and probably will go on making them. Recovering from them isn't always easy, but you learn and move on. We don't have an omniscient view of our company and every possible outcome of any marketing efforts. We play the (what we think are the) risk/reward odds and learn.

      If you fathom the far reaching effects of any promotion your company does, congratulations. That really is awesome.

    • Johnkucik

      Guess you have never made a mistake or been pressured by sales tactics.

  • Craig Furbutson

    What do you think happened with Jesse Burke when she decided to run a promotion her business could not afford? Didn't she run through the predicted sales and expenses? Was something misleading?

    It seems like a business must know that they'll lose money upfront with a Groupon, and know they should set a limit or skip the deal if they can't afford it. And because Groupon has been around so long, there is a large amount of data about what sort of sales a business similar to yours makes.

    I think I need more data on this event before I can start to draw conclusions.

  • http://www.facebook.com/jeetensheth Jeeten Sheth

    I agree with the majority. You need to understand your market and make a promotion. You invite people and just cannot assume to make them customers. Moreover, if your product had been great, I am sure atleast a few % of these would come back.

  • TahoeBlue

    A great reason not to use promotions or coupons at all !

  • http://twitter.com/L1AD LIAD

    really interesting insight into the mechanics behind groupon.

    clearly, not all that glitters is gold

  • http://twitter.com/redbord Mike Redbord

    This is definitely not the first time I've seen this. Promotions have to be handled carefully to predict [positive] ROI over a new customer's lifetime.

  • http://www.mcgrawmarketing.com patmcgraw

    If you need help calculating the impact – check out these free campaign calculators/tools that will help you identify costs so you can project what it will take to turn a profit…http://dwsassociates.com/Direct-Marketing-Marketing-Financial-Calculators-0129/

    • http://www.Kens411.com Ken Brand

      Reminds me of the real estate Relocation business, and their over-time escalating referral fees, which real estate companies chase like crack cocaine. Uggg. Love Sasha's quote, I'll be quoting her in the future. Like you said, there are two types of recommendations, “Hey, use Lisa because she's awesome, knows her stuff, kept her promises and did a fabulous job, or even if you do a great job, but for a cheap price, it's natural that they will say, “Hey, use Lisa, she gave us a great deal, she's super cheap, and good too.” Price alone is a race to hell.

  • Jey Pandian

    A good post – I hear there is a problem like this for Yelp as well. Everytime Yelp throws its elite yelper parties, Yelp goes shopping around at different locations and expects small business owners to foot the entire cost of transactions. Imho – these losses are unsustainable – is there a way to create a win-win situation for both merchants and consumers?

  • Per von Zelowitz

    Don't Groupon customers do the math?

    • http://anEclecticMind.com Maria

      I don't think they do. I think they see revenue to get them over a business slump. I think they're conned by Groupon's sales staff to think that this is the ultimate advertising. I KNOW they rely on unredeemed Groupons so they have some revenue without an associated expense.

  • Ashish

    You might want to rewrite the linkbait and not use the phrase “nearly bankrupted here business”

  • http://www.facebook.com/antonymcgregordey Antony McGregor Dey

    Perhaps Groupon could create new value for the business's it works with by creating longer term social value. 'Make' Groupon customers to write a review of the place in return for their discount and then syndicate those reviews to other sites like Yelp etc. Of course this only works if the business quality is good but it would help to create immense longer term value from the short term Groupon customer

    • Johnkucik

      Yours is the first smart comment I have read regarding the Groupon business model

    • Scree

      How can you get someone to write a review if they've already received their discount? Is the thought that they must visit the place, write the review, and then get a coupon for their second visit? I can't see that working unless the customer is already loyal to the place…in which case, the business model of finding new customers doesn't work.

  • Lou

    while you got a nice catchy headline and a bold link like “how Groupon nearly bankrupted her business.” – if you read her post, it wasn't groupon that nearly bankrupted her business — it was her bad decision to offer a deal that she couldn't cover. So if she bought some google ads at $20 a click and lost 8k on that, would you also say “how google nearly bankrupted her business”???

    • http://www.groceryalerts.ca/ groceryalerts

      Honestly, most deal seekers will move on and not become loyal customers. Any groupon success stories?

      Couldn't they just do a coupon for 50% themselves and save themselves $3 per transaction.

      I don't get small businesses using group coupons – the numbers do not make sense.

      • http://www.facebook.com/people/John-Barton/1575755349 John Barton

        The premise behind Groupon that is “new” is the group buy for consumers. Basically they offer a “deal” but in order to get the deal a target number of coupons have to be sold. Taking the coffee house as an example, Groupon offers a $10 voucher for $5 but they have to sell 100 vouchers or NO ONE get the deal. So the idea is that Betty calls two friends, and they share it on Facebook, and through email and pretty soon Groupon sells 100 vouchers and the retailer is guaranteed $250 in sales and presumably x-number of new faces coming in the door.

        The numbers don't make sense if the retailer is taking losses on the sales. For example if they are making $2.50 on $10 worth of merchandise but their net cost is $4 then they are losing $1.50 per sale. If the net cost is $1.50 then they are making $1 per sale.

        If it were me I would do the first one as a dead break even to see what would happen.

        The other thing about this is that retailers need to look at this as a way to actually get bodies in the store which is where the real SELLING begins. If all you do is hand out $10 worth of coffee and cookies for $2.50 then you're going to go broke anyway. When those people show up you need to figure out how to sell them something else and MAKE them into repeat customers.

        • Henrygoh

          wat is Groupon's market positioning?

    • Johnkucik

      Groupon is a good deal for customers but a bad deal for any one who does it. In reading all these comments I have yet to see a business owner say it was good for my business. I find your comment rude and stupid. People love the Groupon deals and I will bet you are one of them. Not everyone understands advertising but Groupon does and it knows what these offers can do to a small business.

      • http://www.facebook.com/people/John-Barton/1575755349 John Barton

        It's only a bad deal for a business if they accept a bad deal. Local businesses do coupons ALL THE TIME in coupon books, newspapers, etc…..

        I guess the thing that bothers me about the article is the line that “groupon wanted the whole $6″. I can't see how in the world that this would be true or that anyone would ever offer such a thing much less accept it.

        Obviously Groupon is depending on businesses to take sever margin hits in return for “exposure”. In some ways this isn't much different than spending x-amount on advertising and not seeing a bump in sales.

        The upside is that Groupon can provide real results to the retailer. As a retailer you see exactly how your campaign worked in terms of how many people bought into it. And you only pay based on how many coupons Groupon sells. So the retailer should make sure that their calculation works for them or pass.

        And the other thing is that if I did this then I would make sure that I got all the INFO from every Groupon user who walked though the door and put them on a mailing list. Sure a lot of them are probably just bargain hunters but that's fine. You can send them your own “coupons” down the road.

        In other words there are many upsides to using Groupon. Pricing yourself out of business is your own fault. You should not be in business if you can't use a calculator.

    • Johnkucik

      I have talked to Groupon and trust me they are no boy scouts they take advantage of small business owners. I was smart enough to say NO others can be persuaded. They made a full court press to sign my business capone's Dinner and Show but I am marketing and cost savy enough to know it was a bad deal for the merchants. Do you own a business? Any idea of what getting only 25% of regular price would do to a business? Unless you are a business owner you should shut up!

      • tammy

        Do you think it's a good idea just to advertise a few items in your menu so that the customers will actually purchase other items in full price while they are using the coupons?

  • http://blog.daryn.net daryn

    If you don't understand your profit margins and acquisition costs, that's your own damn fault.

    Here's a small counter-anecdote for you: http://www.capitolhillseattle.com/2010/09/11/surviving-nightlife-biz-beyond-pike-pine-living-room-gives-itself-a-groupon-birthday-gift

    • http://twitter.com/scottru Scott Ruthfield

      The owner clearly takes responsibility for what she did and understands the costs of her business. It's not the first time any of us have read about a marketing campaign gone awry, it won't be the last time.

      The point is that businesses that depend on relationships build long-term value by acting as partners in those relationships, not by attempting to maximize immediate returns (i.e. you don't have to win by that much).

      Helping create a campaign that might bankrupt Groupon's customer(*) doesn't benefit Groupon in the long run, and they clearly have more knowledge of the impact that their program is having on its businesses in aggregate than anybody else does. It's a land grab and they're welcome to play however they want, but helping establish best practices will benefit them in the long run.

      * – Of course the business isn't really the customer – we are. Cue the quote du jour – “If you are not paying for it, you're not the customer; you're the product being sold.” (http://www.metafilter.com/95152/Userdriven-discontent#3256046)

      A business might think that Groupon is there for its benefit, but it very clearly is not – Groupon cares about and sells to the deal-driven customer.

      (Eh, this should have been a blog post.)

      • Anon

        Actually Groupon may be hurting your business by driving away regular customers instead of helping your business by bringing in new customers too.

        Few months ago we had a bad food and service experience and prices were higher at a place we frequented 3 – 4 times a month. We found out that they had a Groupon promotion and were very busy.

        Now, we check Groupon on to make sure the place we want to go doesn't have Groupon promotion and if they do we avoid the place until promotion has passed most of its validity.

    • Johnkucik

      Come on now how could they know how much production it would deliver and the sales pitch by Groupon is deceiving in that people using those coupons will probably never come back. They are in it for the deal and will wait for the next Groupon deal or other business models such as Groupon

      • http://blog.daryn.net daryn

        I haven't seen Groupon's marketing materials, so can't comment on that, but I'm still of the perhaps naive belief that if you deliver a quality product or service at a reasonable normal rate, than any promotion to get people in the door can lead to repeat visitors. You just have to be sure you can execute the promotion in a way that you can handle and impress your new customers with.

  • Asp

    cunt

  • Juniorr

    “you're not leveraging your synergy.” ???

    Really?? What a dumbass comment.

  • Deano

    I think it was a joke

    • That one guy

      I don't think Juniorr thought it was funny. Neither do I, but who cares.

  • XIngSoo

    Oh wow, kinda scary when you think about it. Wow.

    http://www.privacy-web.cz.tc

  • http://store.greenhitshirts.com/ Ty Palmer

    Thank you for helping us avoid a potential pitfall. As a relatively young online retail company, we can't afford any major mistakes. Keep up the good work of informing our hard working community.

    Ty Palmer :: Founder

  • Pingback: Groupon’s Success Disaster | Glenn Kelman | Voices | AllThingsD

  • Robert

    The Web 1.0 e-commerce model was selling $1 bills for 50 cents. The Groupon model is getting others to pay you 25 cents for selling their $1 bills for 50 cents.

  • http://twitter.com/CulturaHQ Jason @ Cultura HQ

    Groupon is expensive yes, but the business has no out of pocket cost.
    The bargain is hard to resist for a small business with a limited marketing budget – often no budget.

    I have been fascinated with the success of Groupon and more specifically that everyone seems to focus
    on the discount instead of the discovery aspect of it. I feel the discount is the motivator and not the utility.

    I wrote a post about it here – http://coupons.culturahq.com/

    • Johnkucik

      It may work for businesses with low overhead I advise restaurants not to jump on the bandwagon.

    • Johnkucik

      What is your overhead? If it's 20% then it could work for you but much more than that and your screwed

    • Johnkucik

      Have you tried it? What's your overhead percentage wise? The bargain can devestate a busineses bottom line as is the story we are all replying too.

    • Johnkucik

      What is your overhead? If you have a low overhead maybee what you are saying is true but for most businesses this is truly a BAD deal.

    • Johnkucik

      No out of pocket cost if you have no overhead

    • Johnkucik

      Yeah it does have an out of pocket cost your business over head. I see you have made mahy comments praising Groupon do you work for them?

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  • http://twitter.com/rickyyean Ricky Yean

    andrew mason came out with his response: http://groublogpon.com/cities/too-much-of-a-good-thing/

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  • http://flocial.com flocial

    I've read similar stories, before Groupon, how being covered in a magazine ruined some really good restaurants and cafes because bad-mannered customers that only cared about chasing trends would come in droves, flood out the regulars and never be seen again. Unfortunately, these “new” customers never came back and neither did the regulars. For some businesses Groupon is the equivalent of buying website traffic. It's not going to convert well so beware.

  • http://abarba.com/ Anthony Barba

    The challenge with the model is marketing a company/brand that doesn't kill them.

  • swagner2

    Great point. We're trying to do the same thing for small retailers. We have an app that allows a retailer to run their own deal of the day across social media, email, sms and their website. If any readers would like a Beta invitation we have 50 for redin readers here. http://adealy.com

  • Stefanie

    Hey Baker! Although I'm Chicago reading your post, my family is in da Burgh and very fond of baked goods. What's the name of your shop, and where are you located? Maybe I can help you get one more customer. :) It's all about word of mouth!

  • FabFindGeoff

    I posted this on the actual Posies blog post, but though it would be appropriate to share here:

    “Hey everyone, definitely an interesting read and I would like to commend the Posies team for sharing their experience with Groupon.

    There are ways to make an excellent social commerce campaign and obviously there are things to consider before entering into such an arrangement.

    I would just like to share how we here at FabFind operate so all business owners out there don’t entirely dismiss the concept of social commerce or daily deal sites.

    First off, it is extremely important that the site works closely with the business to structure a deal that makes sense for them and takes into consideration their unique circumstances (margins, how employees and customers will be impacted by volume/ability to access the deal).

    Selling excessive numbers, something Groupon may think of as a competitive advantage, can be extremely detrimental to small businesses and ultimately the user experience. This can impact both companies in a harmful way.

    We, at FabFind, use a social commerce model that is based on setting a limited quantity that the business agrees on, in order to find an optimal balance of price and deliver-ability.

    Finding these appropriate quantities and making it accessible to customers may seem counter-intuitive as it limits revenue, but once we sell out we simply move onto a new deal, without placing an unnecessary burden on the business/consumer.

    Come check us out, I think you might like what you see. Look for us on the national stage soon, too. (We’re Canadian, eh?)

    Oh and Jessie, good luck with all your future promotional endeavors, everything is a learning experience and you certainly have a lot of great customers/people who care! Cheers!

    Geoff
    http://www.fabfind.com

    So yea, ;)

  • Optimist

    Groupon will fail!
    Facebook too!

    • Pessimist

      Based on….?

      • Optimist

        Cheap prices for stupid things…..Got it?

  • http://twitter.com/n8sch Nate Schmidt

    Glenn, what we need is a company that actually tries to give more value to its customers, maybe by working on a more hyper-local level? If I can think of any companies like that, I'll let you know.

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  • Virtualgirl

    Groupon taking 50% is riduculous, business people should be negotiating for groupons cut to be only 10%…come on people look at the numbers they are making – keep your business profitable or we all loose in the end!

  • http://www.facebook.com/bucchere Chris Bucchere

    Whereas the data don't lie, your article sheds an unnecessarily negative light on discounts. Trying to attract new customers through a Groupon (or Groupon-like) deal can indeed have a negative affect on profits if you don't have a retention plan in place aimed at keeping those new customers and making them profitable. But a different kind of reward/coupon — one given to regular customers to say thanks for being loyal — has the opposite effect. It encourages loyal customers to stay loyal (and profitable!) and it encourages occasional customers to turn into loyal fans. There's most definitely a place for those kind of coupons in my wallet and in modern (e)business.

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  • Chad

    The comment made that Groupon's take was pure profit is crazy. To send an email to 100,000 subscribers in Portand is not that cheap, they also have to pay a writer, a sales person, credit card fees.

    If they sold 1000 groupons the featured deal probably received around 15,000 impressions. In comparison, a banner ad geo targeted on a decent site above the fold would cost $180 ($12 CPM) and would have attracted 10 – 11 customers. (1% CTR and 7% conversion). To get 1000 customers it would cost $18,000 in banner advertising.

    • Srini

      Fundamental question is what kind of customers are you acquiring? Targeted buyers (with or without deal) or “Deal lookers” with interest in your offering. In addition cost-benefit measurement is needed to arrive which is better – if each coupon is sold upwards of 50% discount then cost of sale goes up (assuming $10 discount per coupon it will be $10K cost of sale, higher this discount the more is the cost) and to that add the commission to be paid to group on on 1000 coupons sold (50% of sale price – assuming $10 sale price – commission is $5K).

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  • King Gator

    Most companies set a limit on how many can be used and cut their marketing/advertising budget by the amount they’d be out if every “groupon” was used in that time period. Not to smart!

  • Dutchs

    “the old advertising saw about the lifetime value of a customer”

    Whenever someone tries to sell me something that “will save money in the long run,” I say “fine, you take the long term savings. I'll take the money up front.”

  • Johnkucik

    I was approached by Groupon and we could not work out a deal. I find the company technique greedy to say the least. Some businesses may benefit from this program but it will take a LONG time to see the benefit. If you own a business with low overhead it may work for you but in my case I was asked to provide my show, dinner, unlimited drinks and dessert in return for about $7.00 what a joke.

  • http://quidquidquidquid.blogspot.com quidquidquidquid

    There's another side to this. I'm an occasional Groupon buyer and I have been often been treated like DIRT when I try to redeem them. Imagine how friendly the folks at Posie's were to the 600th or 700th person who came in to redeem their Groupon. It seems that some business owners have not properly calculated the impact of their Groupon promotion, and then take their frustrations out on their customers. I bought a gift certificate to their place of business and now they're giving me a hard time about it? Is it my problem that they miscalculated what would ensue? At best, a Groupon gives me an opportunity to try a new restaurant, store, service, etc. that I will return to and pay full price at in the future. At worst, it can be a downright humiliating experience that virtually guarantees that I will never return and will warn my friends against.

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  • BobPhibbs, The Retail Doctor

    Groupon is not the savior that the media continues to hold up in awe. Their model is commoditizing retail, encouraging customers to “never pay retail again” and all based on “the hope” to local mom & pops desperate for customers, of people returning. I wrote an 11-part series about the dangers to small business including two case studies, the first part begins at http://www.retaildoc.com/blog/groupon-worst-marketing-business/

    • Kevin C

      I understand where you're coming from but I try not to pay retail as much as possible.

  • Srini

    Its interesting to hear some of these experiences – if overheads of a business are high this won't work and if it is an established brand they may not want to associate with deals…so in long run does it work for specific kind of businesses or targeted promos only?

  • Atlantadining

    I agree – I think it is a bad deal for most of the businesses — I think Groupon appeals to the less informed business owners that are acting on emotion rather than rational thought – I am the founder of a 20 year old program that allows the restaurant owner to pay for advertising with food – $1 for $1 credit is given — the restaurants love it and we sell the food credits as Dining Perks – mostly in the Atlanta area — thanks for letting me add my 2 cents – Joe Somerville Jr.

    • JR

      You are right- it is a bad deal for the majority of the businesses out there. If the marginal cost of printing another ticket to an outdoor event or something like that is next to nothing, Groupon is a win/win for everyone but if it involves a product or a service with feedstock costs, it is another story.

      We have started MerchantRock.com as a platform where merchants gain strength by sharing knowledge and ideas in order to increase their profits, not Groupon's

  • Nwsv2

    Why is it that Groupon does not pay the full amount collected to the merchant on the first check.

  • E415

    Here's my take.

    If you're a business owner planning to run one of these campaigns you must know your numbers and price (and cap) the deal accordingly.

    You shouldn't look at this as revenue generation but as customer/lead acquisition. If you make a front end profit great. Just don't rely on it.

    What you should be doing is getting every new prospect who comes through the door on your in house customer list (does Group On share customer contact data with the merchant?). This allows you to send out your own promotions via SMS, email, FaceBook, Twitter, etc. without the steep discounts or revenue sharing.

    The Group On model works really well with merchants who offer a product or service which uses continuity. You get the first lesson or product at a discount which allows the prospect to test the waters. Future lessons/products come in at full price. The types of companies who can benefit; music instructors, martial arts studios, monthly clubs (wine, beer, cake etc).

    The most important thing is to know your numbers. If your deal results in too high a cost for customer acquisition don't do it and make sure you build a customer list that you can market to again and again.

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  • guest

    can you please e-mail me your contact number. I would like to consult with you about my business. I would appriciate it if you do that. I can come to your coffee shop and take only 5 min of your time. my e-mail is a_assadyari@hotmail.com

    Thank you

  • Joan T

    Find a deal site where you can pick a reliable reliable deal! Here is website that lists them all: Check out http://www.GroupBuyUnited.com! :-)

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  • choco63

    I would not normally post my comments in a blog with people I don't know, but i have to agree 1000% with what happened to Posies Cafe. We have been dealing with Groupon as they really want us to provide a service for their 250,000 list of users and when I say service, they want us to give it away, a $550.00 value for $99.00. We don't need people in our door that bad that we would cheapen our reputation nor do we want to get so many patients that we can't accommodate them. While they make it sound enticing, throwing number of sales in the 1000's at us, we have not figured out a way on how we would come out ahead financially. They take 60% + of the money from sales. They even reduce the amount you get to cover credit card fees they are charged! I think Groupon has forgotten what is fundamental in running a small business, getting new people in the door that maybe haven't heard of you, building a reputation that excedes expectations, how can you do that when you sell a service for $99.00? Take the $99.00 we may get 45%, leaving us $45.00 for a $550.00 service. How do you pay your employees? How do you cover overhead. If you sell too many then you spend 8 hours a day servicing Groupon customers and let's say each service takes 1 hour. We've only earned $360.00 a day? Who can run a business on that? Think long and hard, run your numbers and see if Groupon is right for you.

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  • Kibbo

    It's not Groupon's fault that Posie is a fucking idiot.

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  • Pclprod

    I have a bit of a different take on Groupon. For many years I was in the photography business and the way we got the majority of our customers was with either a free picture certificate of a loss leader (I am sure anybody over 45 remembers the K-Mart $.38 5 x 7). This was our customer acquisition cost. No different from a newspaper or TV ad. And THAT is the way Groupon needs to be looked at. An advertising cost.

    The number one mistake a business makes when someone comes in on a free of discounted deal is to treat them like they are what the owner refers to as the “Groupon Customers”. It is the way you treat the people that determines if they will become long term loyal customers to your business and buy more than their deal. And I don't how good you think you are at “knowing” who are the buyers and who just want the freebies….YOU CAN'T TELL.

    If you offer a deal a certain percentage of the people participating will only take the deal or they will feel they got snookered. It is the cost of doing business. No different then running a major newspaper ad or TV ad and then having it snow. That comes out of your profits as well. At least with Groupon you only pay for people that are buying something. This is still better than traditional advertising since it only costs you money if they actually come into your store. And don't get mad at the customers for trying to stretch the rules….it happens every day at Walmart, the grocery store, etc. (limit one per customer…etc.) It is human nature.

    The final point is that there is also what is termed “breakage” that must be calculated into your actual costs/profits. You will receive 50% of the money from your deal from Groupon, but 100% of those people will not show up by the expiration date. This changes your actual cost per customer. If you choose to enforce the expiration date (I wouldn't – I want the customer to experience my product and have the chance to make them a repeat customer), that money goes against your costs.

    Groupon gets people into your store. It is up to YOU to get them to come back. This is just my $.02.

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  • http://twitter.com/Eyesno Darryl Wright

    This is a common story among small businesses and I find I have little sympathy. Groupon deals have mass appeal and a mass audience. It's extremely effective in terms of sales and they'll do the job of getting people through your door. It's up to you to ensure those people return. How could you not have known what the results of your deal would be? Did you even ask the question 'How many sales can I expect?', 'What's the general ratio of coupons sold to return customers?'.

    I don't understand why a small business that can barely make it's payroll would give away thousands of dollars of its assets to 'discount' hunters and then regret doing so. It's a no-brainer that people who pounce on Groupon are looking for a deal and may never return.

    As a Groupon purchaser myself, I've tried several business I'll never return to. I've also tried several I now return to regularly. The question any Groupon-trying business must ask themselves is, “is this the best way for us to help our business?”

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  • http://www.facebook.com/people/Jennifer-Williams/100001867149707 Jennifer Williams

    Just consider Groupon as a way to marketing your business. The key issue is how many user will come back without groupon. There are numerous Groupon type of website come out. Groupon charge 50% of the sales, which it a bit high, Other site would not charge this much. As they have fewer reader, those smaller one maybe a good try for business. There are also many daily deal aggregation site, the best one I use is Social Deal Map http://www.socialdealmap.com which show all of these daily deals on a local map. In this way I can easily find out what is available nearby

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  • http://twitter.com/cruisingmom danielle mangum

    I think it is up to the Merchant to make a profit. Most mark up 300% anyway. You buy from china on the $1 you are making a profit. Just don't be greedy set limits on what you can handle. It is good for small businesses otherwise you will be waiting for the door to open in this economy really I don't shop that much or go to the movies but if I had a deal I am going to go out. This one groupon this weekend sold 18,000 $4 hamburgers they orginally sell for $8 a dang on pack of hamburger you can make six burgers out cost that much. So who is not making a profit I don't think it is the burger joint notice they only offered a burger you still have to buy the drink and the fries. They might of sold more than that because the deal was still on last I looked never seen the ending total. I send groupons to my friends just becaue I see a good deal in there city I don't live there. This kind of free advertisement is priceless your know how much per click google cost. All the negative people don't use groupons but don't discourage others bottom line it is your business nobody elses on here do what you need to do to get customers. I am all for groupons that is why I signed up to be a groupster with my own website to make deals and earn money for doing what I already did for Groupon and got nothing share the deal http://dealbreaker.giscounts.c

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  • kh

    Why is it so hard for people to do the math and ensure that they don't overextend themselves, its basic. People that lose money running a groupon are foolhardy, you can place limits, you can set the pricing, etc. Like any good sales company groupon tries to get as much margin as they can, if you can't figure out the parameters of a deal that would be beneficial to both parties, simply hang up the phone. Bottom line, the business owner is ultimately responsible to not open themselves up to a possible financial catastrophe, do your homework. Like John Kucik………

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