Groupon’s Success Disaster

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

The coffeeshop 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 Groupons 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.