Groupon’s Success Disaster

http://blog.redfin.com/blog/2010/09/groupons_success_disaster.html

by GlennKelman • 16 years ago

198 121 16 years ago

blog.redfin.com

vaksel• 16 years ago

at this point groupon has more or less a monopoly so they can easily rape the businesses..

but this article seems to blame groupon instead of the business owner.

1. why would you price your promotion at a loss? 2. losing "$8,000" may sound like a lot...but in reality it should be looked at as $8,000 worth of advertising. And getting your message out to 200,000 or so local customers for that little isn't that bad.

cludwin• 16 years ago

By that logic you argue that $40 CMP's are reasonable for a email marketing campaign.

I haven't priced that kind of a service and on the surface it sounds pricey. However it may in fact be much cheaper than some other mediums with that type of each like radio or TV ads.

You could always advertise using google local which would be much cheaper, but something tells me that being the groupon deal of the day is a much more compelling proposition.

I guess I agree, it isn't a bargain but it's probably not the worst investment considering the the alternatives.

il• 16 years ago

Not sure about Groupon but FYI a well-targeted list usually goes for about $60-$80 CPM for a single mailing.

Yeah, they're that valuable.

espadagroup• 16 years ago

Thrillist charges $200+ for it's email ads.

xentronium• 16 years ago

2. It's -$8000 net gain which means that advertising cost them $8000 plus any additional profit it brought.

I still don't get it why you would vouch for such a thing like groupon. For me, it's quite obvious that you'll get a line of people wanting to buy coffee and a cake for this coupon and nothing more. With zero conversion AND negative profits.

potatolicious3• 16 years ago

I find that curious also. Based on every single Groupon retrospective I've seen by any business, all of claimed that repeat customers in that demographic are almost non-existent.

How is Groupon dealing with this? Clearly their current business model is only sustainable while businesses still believe they can net repeat customers via these promotions. Given the increasing amount of negative press - most commonly from small businesses - it's only a matter of time before everyone clues in.

jcnnghm2• 16 years ago

1. That's groupons business model. The average profit margin in the service industry is less than 10%. If you give people a 50% discount, you are definitely going to be losing money. The idea is that you let them try your place, then they keep coming back. In practice, most of the places I've talked to haven't seen it this way.

2. It's really expensive for what it is, and could easily tank a small businesses cash flow. I know of two different places that did $30 gift certificates for $15. Of the $15, $7.50 went to Groupon, so the businesses got $7.50 per transaction. Both sold over 1000 coupons. If half of those coupons are redeemed in the first month, and it costs $27 to service each $30 transaction, you would see a negative cash flow impact of $9,750, and a total cash flow impact of $19,500. The average restaurant spends about $850/month on advertising, so a single groupon would soak up their entire budget for two full years.

Everybody that I've talked to that has used groupon (~10 restaurants) has said that they would never use it again. It's too expensive, and the people that buy it aren't the people they want to attract.

Ultimately, I'd be surprised if somebody else didn't come in and offer the exact same service for free. It doesn't take a genius to sell stuff to people for less than it costs. Incidentally, I did a survey of some of my customers (http://barsannapolis.com) about offering the service for free, and they largely weren't interested because it doesn't produce the results they want.

mediaman2• 16 years ago

Both of your statements are based on equivalency between marginal cost and average cost.

The marginal profit in the service industry is not less than 10%. It would be nearly impossible to pay for all the fixed costs of running a service company (rent, labor, depreciation of PP&E) if that were true. Yes, the net profit margin is less than 10% (typically 5-7% for restaurants). The two are not the same.

Many gross margins in the service industry are 30-50%, or often higher. Think of the actual cost of a cup of coffee, or of the ingredients in a sandwich. It's not high relative to the price charged. But quite a few must be sold in order to cover the fixed costs of keeping the store open.

This is why location matters so much in retail. It is not because it allows you to charge significantly higher prices, usually. It is because it gets you much higher volume, which is principally what determines the net profit of a retail outlet.

That's why Groupon actually works quite well for many such service businesses. It drives volume, which is what matters for net profit. But it would be loss generating for a low gross margin business to use it, such as a high volume mass retailer.

bbqtom1400• 16 years ago

Thank for your opinion and you are on the right track. It actually is a bit worse than people whom aren't in the restaurant business probably realize. The average restaurant in the U.S. makes between 2.4 and 3.6 on every dollar without alcohol sales. Restaurants that serve any alcohol along with their food sales actually do a bit worse on the average, 3.4% on the higher end. The average is the key and folks who think it is much higher don't do the books. On the average most cannot afford many hits on their controllable costs besides giving 50% away on their food sales (coupons for alcohol are usually illegal). For every dollar spent on advertising or live music I need $4 or $5 back to break even with what was given away, coupons as an example, or spent. I have even put a coupon, as a lesson to a coupon salesman, with no reduction in price, on purpose. I received many,30 the first day, but no one I saw or spoke with ever came back to pay full price. At least the coupon salesman stopped bugging me. Groupons are OK if you are a new business. In my experience they fill your business with folks who rarely return. Thank you.

eli• 16 years ago

Having a hard time seeing how this is Groupon's fault. Maybe a better job reminding business owners not to offer more coupons than they can actually support?

jlees3• 16 years ago

Well, the basic economics of giving away too many coupons is definitely the core of the problem, but it looks like Groupon aggravated it somewhat.

By taking a high cut and targeting discount-minded (rather than repeat-custom-minded) clientele, the $8000 basically went down the drain, and the business experienced more headaches dealing with testy Grouponers than they would normal clients.

Part of this is a learning experience about what you offer as a discount, how you offer it, and who you target. Instead of offering half-price cookies, offer half-price vegan cookies or similar. Do a smaller test first (though maybe Groupon doesn't allow that?) so you can get an idea of repeat rates and discount-hungry one-off customers.

The word of mouth gained from this one campaign may well echo forward for months to come, but it's still sad to see a business struggling when a site like Groupon is supposed to be fantastic for both parties involved in the transaction.

pavel_lishin• 16 years ago

> By taking a high cut

This is what confuses me. Shouldn't the split have been determined before the contract was signed? I don't understand how they could have made a deal with Groupon, but not worked out who would keep what percentage.

desigooner• 16 years ago

It seemed like the business owner jumped in with a no-holds barred approach as far as discounts were concerned in order to get more feet into the shop. Improper planning, failing to study the market and unrestricted incentives were the points of failure and not Groupon. If anything, they just got a big boost as far as the # of customers was concerned.

Maybe they should have restricted the $ amount or number of coupons given out in the promotion or introduced some conditions instead of just going all out.

brm• 16 years ago

Making a poor business decision and then somehow blaming Groupon for it is no better than building a house in a flood plain and not having flood insurance.

Groupon works wonderfully for businesses with predictable fixed costs and decreasing marginal costs - bowling alleys, stadiums, art museums etc... It does not work well at all for businesses who need to source product, prepare goods, or provide service - restaurants especially

potatolicious3• 16 years ago

> "It’s because we cannot afford to lose any more money on this terrible decision I made"

Quote from the end of blog post. Having read through the whole thing I do not believe at any point she blamed Groupon for her predicament - she walked into it eyes wide open and appears to acknowledge this.

It does, however, raise interesting questions about Groupon's relevance to the small businesses they purport to help. Groupon is supposed to be a win-win for consumers and small businesses alike, but it would appear this may not be the case. Seeing as how this is core to their business model, if this is a regular case I would expect this to sink Groupon sooner or later.

anigbrowl• 16 years ago

Sounds quite similar to the problems people have reported with Yelp in some ways. Stories like poison the well for anyone trying to sell net services to small businesses later on, too, even if the deal is much better value. I gather a lot of cafe owners are done with the free wifi too.

alanstorm• 16 years ago

It doesn't seem like Posie's is "blaming" groupon, the owner owns up to their mistakes

From http://posiescafe.com/wp/?p=316#

"the single worst decision I have ever made as a business owner"

"we cannot afford to lose any more money on this terrible decision I made"

Jessie owns up to being the one at fault here.

Beyond that though, what does it say about online marketing, and our industry in general, that high pressure sales tactics are leading small business owners into bad decisions like this?

An industry based on caveat emptor, a lack of trust between actors, zero sum games, and the love of a quick buck over all else leads to an ugly future.

codexon3• 16 years ago

An industry based on caveat emptor, a lack of trust between actors, zero sum games, and the love of a quick buck over all else leads to an ugly future.

That's how capitalism has worked for hundreds of years. It was only relatively recently that western nations have slowly shifted away from this model with the publication of Upton Sinclair's The Jungle, and the Sherman Anti-Trust act in the early 1900's.

Of course you still have libertarian thinkers paid for by Koch Industries who preach that two greedy people will always cancel each other out, and benefit the market.

itblarg• 16 years ago

Groupon CEO re: their cut: “If we were economically rational, we would take even more.”

http://venturebeat.com/2010/09/15/demo-the-secret-of-groupon...

dasil003• 16 years ago

I immediately thought of this quote too. I see this as sort of a honeymoon for Groupon while people figure out how it really benefits (or doesn't benefit) their business. Over time their margins will probably drop considerably, so why shouldn't they take what they can get now? I can see how this sucks for small businesses who get flattened by the runaway train, but is it Groupon's responsibility to sabotage their own business model by performing due dilligence for their customers? From what little I know everything seems clearly above board.

yock• 16 years ago

The problem isn't Groupon or the shop in question. People were creating multiple Groupon accounts in order to get multiple copies of the offer from this shop. Dishonest consumers are the problem here, though this is a problem that Groupon could do more to curtail.

marcusbooster2• 16 years ago

But this is exactly what a small business is buying from Groupon. If the quality of their lot is worse than other advertising, then more the reason not to partner with them.

pyre2• 16 years ago

  > But this is exactly what a small business is buying from Groupon.

But this is not what Groupon is billing themselves as providing though...

zaidf3• 16 years ago

Like I keep saying, groupon's longterm value is very, very questionable.

The #1 value they are bringing at the moment is convincing shop owners to give a really kickass coupon. That's it!

That mailing list of theirs? Sure it's valuable. But send that same mailing list a 15% off coupon typically found in the newspaper and they won't give a crap.

And give the same groupon offer in the newspapers and...a lot MORE people would use it!

patio11• 16 years ago

I disagree. I could create a steep discount coupon. 50% off, bam! The trouble is selling several thousand of them in a day, and my website has a lot more visitors than the typical mom and pop shop.

Distribution is worth paying for. Perhaps not paying a multiple of LTV for. But worth paying for.

zaidf3• 16 years ago

The trouble is selling several thousand of them in a day

(1) How does it matter whether I get 4K people to buy in in one day or over one year? That part is over-hyped and makes for great PR. I am in the same space(sort-of, blinkcoupons.com). Many retailers would prefer a steady flow of new customers over the year versus a one-time rush.

So let's say you paid Groupon $40,000 to get 4,000 coupon sells by offering a 60% discount, I really believe you can spend $20,000 giving ads in the local paper with a kickass offer and get the same number of people to use your coupon(not just buy it). Remember, just because people buy the groupon does not mean they use it--good for groupon, not so much for the retailer which is completely banking on repeat biz.

As a child in India, I saw newspapers sell out occasionally because they had a coupon. Back then, coupon by definition meant a crazy offer. Since, the idea of a coupon has been diluted to mean trash. And kudos to Groupon for being able to convince store owners to give select kickass coupons like they should have been doing all along. But I don't know why store owners will be paying Groupon 60% revenue when they can run an ad in the local paper for a grand and attract similar number of customers but at a lower customer acquisition cost than Groupon.

(2) What's your product? If it's a virtual product(such as yours), I don't think the same ideas apply. People have been desensitized with online tools offering steep discounts. The same is not true with your local coffee shop.

Distribution is worth paying for.

Absolutely! Though this discussion is a more nuanced one.

We're basically debating if all other things being the same, whether other distribution channels can provide a similar service to Groupon at a cheaper cost. I believe they can!

But I'm biased. That's what my start-up is about :)

garply• 16 years ago

Watching the evolution of Groupon clones in China has been very fascinating. First, there was an explosion of sites just like Groupon and a market leader (Meituan) pulled ahead. Just as Meituan really started to clean up, all the major social networks (the Chinese Facebooks and Chinese Yelp) tapped their gargantuan userbases and launched their own Groupons, integrated with their sites. They've really clobbered the original Groupon clones (I know firsthand because the salespeople who contact us from them have become increasingly desperate).

I wonder why Facebook and Yelp don't just clone Groupon and integrate it with their sites. It would be a money-maker, especially for Yelp, since the demographics are perfect.

zaidf3• 16 years ago

Yelp's onto it. Got offer a 50% off deal in the mail today.

igravious10• 16 years ago

Who is GlennKelman and why is he/shey only submitting redfin articles and who are redfin and why are the articles deliberately contrarian and who is upvoting them?

Splines2• 16 years ago

That's not hard to find out.

Glenn Kelman is the CEO of redfin, which has a very cool Google Maps-like real estate search. I haven't done business with them, but have used them as another tool during my house-buying searches.

I wager that Glenn (or someone on the redfin team) is using HackerNews as yet another place to market.

Personally, I don't mind. It's interesting reading.

igravious10• 16 years ago

You know I'm getting sick of the downvoting to the depths of hell any post that crosses the group-think party line of this place. I don't think that it is okay that a CEO of a commercial site is cross-posting here to boost traffic to his website. So what if you've used their services in your personal life and found them useful? How does change anything? My expectation of a site like HackeNews and SlashDot or anywhere like this is that the posts are posted by ordinary users because they find them interesting. If you get upvoted for liking posts that are a) crud and b) probably only used to drive traffic to a commerical website and I get downvoted because of the same then this is a place I don't want to be. Personally I do mind.

pchristensen• 16 years ago

CEO of Redfin: http://www.redfin.com/about/management

In his defense, they have been two good articles so far.

igravious10• 16 years ago

In my opinion no they haven't.

webwright2• 16 years ago

Glenn also won a "best startup blogger" award in seattle.

He's got some really fabulous posts.

igravious10• 16 years ago

That may be, but that does not address my complaint.

clistctrl2• 16 years ago

I'm OK with redfin submitting their own post as I found this particular entry to be interesting, and thought provoking.

igravious10• 16 years ago

I'm not. I didn't.

cullenking• 16 years ago

Have you not realized that a decent amount of the users on HN are successful entrepreneurs? If you ever become a successful entrepreneur, and have some good information to share, are venues like HN off limits? What people like Glenn Kelman are doing is offering valuable information in return for name recognition. I "purchase" their information by enjoying it and sharing it with others, which returns value for the original author. For the HN crowd, that value seems to be name recognition, which leads to people talking about whatever project you are working on. So, you give other people value (information about experience), and in return any future project you put your name on benefits.

Futhermore, if he didn't post it here it may or may not ever be read. Given the great discussion happening about this particular topic, I feel that would be an unfortunate loss. From these comments I have gleaned more information on marketing and the actual costs of certain types of marketing than I have in months. Thanks GlennKelman for instigating the discussion.

igravious10• 16 years ago

<<Have you not realized that a decent amount of the users on HN are successful entrepreneurs?>>

Yes I have realized that - it's hard not to notice that.

<<If you ever become a successful entrepreneur, and have some good information to share, are venues like HN off limits? What people like Glenn Kelman are doing is offering valuable information in return for name recognition>>

Of course they are not off limits. But my expectations are usually that the submitter is some random web-surfer. I think that if the submitter discloses that they are affiliated with or actually are the author then that's cool. By the way, I don't think "Bill Gates, My Hero" is good or valuable information. Similarly I do not find that this article contains good or valuable info, it's just zeitgeisty and filled with folksy homespun truths. In fact the two posts, posted one day after another seem designed to generate discusion for discussion's sake and feel like a cynical ploy to push traffic to the site.

<<I "purchase" their information by enjoying it and sharing it with others, which returns value for the original author. For the HN crowd, that value seems to be name recognition, which leads to people talking about whatever project you are working on. So, you give other people value (information about experience), and in return any future project you put your name on benefits.>>

I don't understand you here. We "purchase" nothing. We are being used as a commodity when someone uses the collective traffic we generate for hits or clicks. What name recognition? If I find some tech interesting I'll take note of the company or author but that's how life works. Name recognition for its own sake is meaningless.

<<Futhermore, if he didn't post it here it may or may not ever be read.>>

It would be if someone else found it valuable or interesting. That's the way these things work. I have no idea if an article by the CEO or an employee of a company gets upvoted purely because of who they are and not because of what the content of the submission is.

<<Given the great discussion happening about this particular topic, I feel that would be an unfortunate loss.>>

But as you say yourself it may have been read so there would have been no loss so no need to worry there then I guess.

<<From these comments I have gleaned more information on marketing and the actual costs of certain types of marketing than I have in months. Thanks GlennKelman for instigating the discussion.>>

That's great but that's neither here nor there in relation to my original complaint. You know I actually probably enjoy reading more or less the same stuff as you. In this case, alarm bells went off in my head - I'm sharing that sentiment with you.

kgermino• 16 years ago

Just because he's a CEO and you don't find the articles interesting doesn't mean that he shouldn't be posting them. As it's been said HN is full of entrepreneurs who contribute massively to the site. If you have a problem with that maybe their not the one's who should leave...

igravious10• 16 years ago

Wow. That's really nice kgermino: a not so veiled hint that I should leave this site because I have a dissenting opinion. And like I keep saying, it's not that I don't find the posts interesting or not. It appears that I was operating under the assumption that the submissions in HN are user-generated. Now that HN has gotten popular and can drive a lot of traffic towards a site I think that people should disclose the fact that they are affiliated with the source or not. And for saying that I repeatedly get downmodded. And that (in my opinion) says a lot about the mentality of HN. I was about the 19,000th person to sign up to SlashDot. When I say that I have certain expectations of sites like these I kind of am not talking out of my ass. If you don't mind I think I'll stick around for a while and see does the mentality of HN improve.

qasar3• 16 years ago

im a chicago entrepreneur and had a crowd funding startup. i sat on a panel with andrew last year before groupon got massive and know as much as anyone about the inner workings of groupon (pun intended).

i write this to give some context to the comment below.

groupon (i dont think maliciously) uses the fact that they are sophisticated and the small business owner isn't to their advantage.

you might think "so what? all is fair"

well, the small business community doesn't live in a vaccum. they talk to each other and talk about groupon (especially here in chicago).yes, they don't know how to create promotions (one of the real values groupon sales people provide) BUT what they do talk about are these horror stories.

so whats the moral here? people aren't idiots and if groupon wants to make sure their two sided platform survives, it can't abuse one side for the benefit of the other.

noodle• 16 years ago

so, then, would you think that there is a place for a business similar to groupon but focuses more on trying to cut deals that encourages the growth of repeat business and/or good customers?

qasar3• 16 years ago

absolutely. the whole digital promotion space is still ripe.

i used to work for the the 3rd largest broadline retailer in the US(SHLD) and we were constantly struggling with this.

Think about it, right now if you're Target, how do you push promotions to those who dont already shop at Target? TV is primarily branding, search is primarily for...well specific product search. Nothing out there for true, replacing the old sunday circular, promotions.

danilocampos• 16 years ago

I see three immediate problems:

1. The merchant didn't think through the consequences of their promotion. They made a deal that was too appealing to an unnecessarily broad swath of potential customers. A commenter on the blog points out that the better approach is to figure out how to bait the hook for a specific type of desirable customer instead of having a fire sale.

2. Groupon didn't look out for their partner merchant. Groupon's job is to be really smart about the business they're in and to share those smarts with their partners. Sure, they're relatively new at this too, but a part of their sales process should be qualifying the deals they're going to be running for people and saying "hey, you know, this might be giving away the farm."

3. People are dicks; doubly so in a down economy.

annon• 16 years ago

Agreed. She should have constrained what it could be applied to so she could manage her losses. If I was going to embark on a Groupon campaign, I'd want to look at how much money I would lose per Groupon and then figure out how many Groupons I could afford to sell.

If you just open the floodgates without calculating how much you can afford to lose, it's not Groupons fault, it's your own. Even a layman should be able to understand that you're going to take a loss in the short term, so don't allow yourself to take a bigger loss than you can afford.

She even makes it clear in her facebook post that this is entirely her fault:

"...I hung up and thought it over. I called him back and said we would have to get at least 50% to cover our costs of product… to this day I don’t know why I thought even 50% would be a good deal for us. Maybe because I thought since we were covering our food costs. What I didn’t think clearly enough about was that that margin we mark up is what covers all of our other costs… like staff, rent, utilities, etc. Our overhead is roughly $25,000/month, and this decision was about to make it so that we didn’t cover any of those other costs."

nathanwdavis2• 16 years ago

Angie's List (my company) has created a similar group coupon system (The Big Deal) as Groupon, but targeted to a more niche market. We actually allow companies to set a hard limit on the number of coupons that can get sold. This allows businesses to offer really great deals that they expect may do negative revenue just to bring in new customers, but control the loss with the limit.

I'm surprised Groupon doesn't do this. Or do they and this business just didn't set a limit?

GlennKelman• 16 years ago

#3 is just brilliant.

MicahWedemeyer2• 16 years ago

Yeah, your #2 really burns me up. Groupon should be the ones to call out point #1 to the business owner. Work with the merchant to design a deal that benefits them.

SoftwareMaven4• 16 years ago

As a business owner, you need to recognize all the costs of your marketing campaigns. It is not Groupon's fault if you fail to manage your business.

Marticus• 16 years ago

Plain and simple: She should have driven a harder bargain or not gone for it.

Also #3, #3, #3, and #3. People don't read the little bit on Groupon where it says "tip like you're not getting a discount," or just ignore it, and also #3.

dgrant• 16 years ago

Merchant should have taken into account #3.

jaxn• 16 years ago

Groupons terms are not really negotiable.

They offered me the same terms when I called them about my retail stores. (want min 50% off for consumer, they take 50% of revenue). I told them it was too rich. They wouldn't budge. I walked away.

They have a 6 month waiting list in some areas, why would they negotiate.

I am amazed that so many businesses accept these terms. There is just no way it makes sense.

waterside81• 16 years ago

You're bang on with #1.

Our company was on Groupon NYC and they took their 50% cut of each Groupon sold (plus the merchant pays the credit card fees - don't forget about that. Your take is actually less than 50%). Luckily we had a bit of a math on our side as our markup on our products is pretty big so even after Groupon's cut, we still made about 15%. As of this writing, only 28% of our Groupons have been redeemed, so we're quite ahead. But I think our case is the exception - I have yet to hear too many stories about businesses thriving because of these social deals.

bradly• 16 years ago

I spoke with a business owner recently that had used Groupon and he shared a similar experience with me.

He said that with Groupon you must discount your offering by at least 50%, and that you must share 50% the sales with Groupon. That means the most you can sell your goods is 25% of there normal price. Where they made the mistake, he said, was in not thinking it would be very successful. You are able to put a max on the number of sells, but they only thought they would sell ~40 so they left it open. They ended up selling over 800.

He said you have to think of Groupon as a marketing cost. Multiply the max you are going to sell times the discount and make sure you are okay spending that much on a marketing campaign.

vidar• 16 years ago

If someone offers you a bad deal, you reject it. Simple as that.

reitzensteinm3• 16 years ago

The numbers do not add up. Assuming 1,000 customers;

$8,000 in losses is an $8 loss per customer. With $3 of revenue. So they're claiming $11 in variable costs to service each customer, for $13 worth of product. No way that is correct - if it is, Groupon is merely the straw that broke the camel's back. Their markup on product should be way higher.

Also, that's assuming no increase in follow on transactions, and that all coupons were cashed.

I don't buy it. Although it definitely could have been a net loss, it wasn't of that magnitude.

jlees3• 16 years ago

The item they're selling for $13 could be a low/zero margin product usually used to bait further purchases or tips. Another issue they noted was people not tipping as if they had paid $13, but tipping as if they had paid $3.

reitzensteinm3• 16 years ago

That would explain it - however, what items fit that profile in a coffee shop? Certainly I can't think of anything from my local.

The tipping is a legitimate issue, however, I bet there are people that spent less than the full value of the coupon, tipping the scales back in the other direction, so I believe my back of the napkin analysis stands.

dzlobin• 16 years ago

Are you familar with the restaurant/food industry? For most places, profit margins are pretty awful. I'll admit ~14% is low for the type of venue this is, but believe me this is common

reitzensteinm3• 16 years ago

I think you're confusing gross margins on individual items with the overall profit margins. My understanding - and I'm not especially familiar with the industry - is that markup on individual items sold is high (after all, how much does a cup of coffee cost to make?), but the fixed costs - rent and employees - are also high.

I'm saying the number didn't make sense because you have to look at the marginal cost of servicing those customers. The rent didn't go up because more people were coming in. Extra employees were only necessary if the place was already busy, etc.

wiredfool• 16 years ago

What I learned in food service is that a general formula is 30% food cost, 30% labor, 30% overhead, 10% profit. If things are running well, you take home some money at the end of the day. The margin for error isn't huge.

mtr• 16 years ago

So assuming that these customers didn't buy anything over $13, her COGS should have been $13 * 0.3 = $3.90. This also ignores the fact that there are people who paid $6 for the coupon and never redeemed it.

Now lets assume that some people didn't redeem the coupon and that her COGS is a bit lower, so COGS = revenue. As labor and overhead are 'fixed', she shouldn't have lost any money as long as these weren't existing customers who decided to use the coupon.

If 100% of her existing customers used the coupon she certainly would have seen her profits hurt. If 100% of these people were new to the business, she wouldn't have made/lost any money on each transaction, but she would have obtained a lot more exposure.

So before deciding to do one of these deals a business owner needs to have a clear handle on their costs, the expected mix of new/existing customers, and the expected revenue from the new customers over some reasonable length of time.

hexis• 16 years ago

I want to work with partners who want to help me succeed. Groupon seems to have failed that test in this instance.

dailo10• 16 years ago

The merchant should NOT have run the promotion at a LOSS. The promotion should have been at least break even, if not slightly profitable.

maukdaddy• 16 years ago

Merchants run promotions at losses all the time. What the merchant should have done was set a cap at the dollar value of the loss they were willing to accept. For example, I'm willing to lose $2000 therefore I will sell only 200 groupons.

brk• 16 years ago

This is a nice statement to make, but how do you propose they could have done that?

Groupon seems to demand at least a 50% discount on normal prices, and then seems to want to take between 50 and 100% of the actual groupon coupon cost. That leaves the merchant able to collect somewhere between 0 and 25% of their standard pricing. Other than software businesses, there are few few shops that have enough of a markup to be able to sell something at 25% of face value and still make money on the product itself, much less cover all the additional overhead.

hugh3• 16 years ago

Well then, I guess they shouldn't have used groupon, if groupon is only good for drawing in customers by extreme loss-making activities.

Bashing your head against a brick wall hurts, but the solution isn't to find the least painful brick, it's to stop bashing.

ladyada• 16 years ago

If you try to get new customers with price-cutting deals, you will get customers who want & expect price-cutting deals.

If you try to get new customers with quality goods at a fair price, you will get customers who will pay a fair price for quality goods.

BobbyH• 16 years ago

One thing the article does not mention is "breakage": "Breakage is a term used in accounting to indicate gift cards that have been sold but never redeemed. Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards." http://en.wikipedia.org/wiki/Breakage

This article (http://www.journalofaccountancy.com/issues/2007/nov/accounti...) says that the average breakage is 10-19%. Let's say it's 10% to be conservative. Posie's Cafe said that over 1,000 customers bought the promotion. A 10% breakage implies that at least 100 customers bought but never used their Groupon coupon. Posie's Cafe only gets half of this, but it does give them a free $300. I guess that's not that much, but if breakage is 19%, 190 customers would have given them a free $570.

EDIT: using kareemm's datapoint of 30-40% below, the breakage would be $900-$1,200.

kareemm• 16 years ago

i've heard from a few friends in the valley that groupon's avg breakage is in the 30-40% range.

awakeasleep• 16 years ago

What category of business do they run? How long ago did they run their groupons?

bond• 16 years ago

"John told me that when the consumer pays less than $10, Groupon usually takes 100% of the money."

How sweet this is for Groupon, they take it all with almost no costs at all...

kenjackson2• 16 years ago

Great quote from the article: "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." Of couse, this assumes that you can afford it at all. But largely accurate if so, IMO.

dean• 16 years ago

This also assumes that expensive == good. In my experience, that's not always true, or even often true. Then you feel really bad.

kenjackson2• 16 years ago

"expensive AND good" is part of the quote. Both are necessary for the full effect of the quote. But yeah, if it's not true, then you feel really bad.

dminor• 16 years ago

A Groupon salesperson called us awhile back to see if we were interested. We crunched the numbers, wondered how anyone made money using Groupon, and told them "no thanks".

In retrospect, I can see it working in a few cases:

1. You are not well known and will attract new customers (marketing expense).

2. The Groupon is worth much less than your typical sale.

3. Your overhead is fixed and you are not at capacity.

jsm386• 16 years ago

And the hits keep coming for Groupon today: http://techcrunch.com/2010/09/16/groupon-photography/

A photography deal offered on Groupon in Atlanta yesterday turned messy when it was revealed that the photographer had promoted her work with stolen images and was far from equipped to carry out the terms of the Groupon.

CGamesPlay• 16 years ago

"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."

I think this is the best takeaway from the article generally (not focusing on the Groupon aspect).

heyjonboy• 16 years ago

"Groupon’s $3 was almost pure profit"

Completely wrong. Just because Groupon doesn't have any variable cost doesn't mean all of their revenue is profit. Credit card processing, bank fees, and chargebacks will eat up 2-5% of the (gross) revenue, and Groupon spends much more than that buying clicks to drive traffic to the merchant's deal.

Groxx• 16 years ago

So... the cafe was stupid, and nearly destroyed themselves because of it.

Capitalism / evolution says they had it coming. Yes, Groupon certainly took the assholish route, but taking advantage of stupidity is within their rights, and even within expected behavior in a marketplace.

FYI for future sales through any intermediary: know your terms. If they charge $X, and you want to sell something for $X, don't do it because you'll be left with $0 (unless that's what you want). If you might not be able to handle above a certain volume of takers, restrict the number of sales.

unohoo• 16 years ago

Lot of you guys are blaming the merchant for agreeing to such a deal. While I agree that the cafe owner should have worked out the economics of the deal, but you seem to be ignoring the merchant perspective across all these Groupon deals.

The biggest goal of merchants signing up with these group buying sites is to get customers and hope that a big chunk of these turn into repeat customers. Unless the merchant is selling distressed inventory (eg: slow business hours etc.) the merchant is not making money on these deals.

And thats the number one thing we strive to accomplish at BloomSpot (shameless plug here). After all, if there's no value for the merchant in such deals, eventually, they'll just stop participating. We want to make this a win-win for both the merchant as well as the end user.

codexon3• 16 years ago

Anyone wonder why Redfin is getting so much coverage on HN recently? They don't seem to be a YC company.

I just took a look at their Wikipedia entry and noticed that they received investment from Vulcan, founded by Paul Allen. No wonder they called Bill Gates a hero in their previous blog post.

http://news.ycombinator.com/item?id=1694538

Revisor• 16 years ago

Because they write interesting articles.

codexon3• 16 years ago

I really didn't think this article had any new insight.

It simply boiled down to: let's capitalize on this Groupon buzz and say we won't make the same mistakes.

Their article on Bill Gates was simple link bait.

troyk• 16 years ago

Sounds to me like an ill attempt by the merchant to cover her ass for treating a loyal customer like an unwanted frugal-monger.

Doesn't change that her loyal customer (Lucinda) is out $6, and Lucinda is very likely to find a new place that knows how to serve up, "Thanks for your patronage, we'll do our best to keep you coming..."

grantjgordon• 16 years ago

I've always had a hint of doubt in the back of my mind about Groupon. They're obviously printing money for themselves, but with the terms they're offering local businesses, at what cost? Conversely, eventually local businesses will wise up and demand better terms, so the market will balance itself, but the casualties during the interim are a real shame.

jojomagictime2• 16 years ago

I work for a Skydiving company that has, to GREAT success, ran two GroupOn promotions. We sell three different types of jumps, 10k 15k and 18k. The 10k goes for $169 and is out of a 5 seat Cessna, available only on some weekends. The 15k and 18k are available weekends and most weekdays and cost $199 and $259. Our 15k and 18k jumps are out of a large, 15 seat aircraft.

We sold 10k jumps for $99. The COGS for this product is about $130. We cannot disclose our cut with GroupOn, but assuming the average 50/50 cut, we're selling these things for less than half of what it costs to produce. Why did we do this?

1.We know that 50% of our gift certificates are never redeemed.

2. We know that 60% of our customers purchase video and/or T-Shirts.

3. We know that about 90% of our customers will jump from 15k or 18k. We just ask that the GroupOns pay the difference in price. $30 to 15k, $90 to 18k.

4. We know that many of our customers bring friends, sign up for our solo training, come back for a second jump, post their video on YouTube, and tell the world how much fun they had.

Our first run sold 800, our second sold 1000. GroupOn customers aren't awful, but they seem to carry a higher percentage of snooty, complainy people. The vast majority of our poor reviews on Yelp come from GroupOn people whose experience really wasn't horrible, they are just particularly nitpicky.

GroupOn is a very dangerous game. I can TOTALLY understand how someone can get their ass handed to them. However, that's part of the numbers game you play. I agree with other comments, if you find a way to get 1000 people to walk in your door and spend money, and you can't figure out how to turn that into a positive for your business, then, well... Maybe you should do something else with your money.

GroupOn is crazy awesome. We love them! We have so far sold 1800 skydives through GroupOn! To put that in perspective, our busiest month this year we put 400 tandems up in the air. In two GroupOn promotions we've sold almost one year's worth of business. Staggering numbers.

MicahWedemeyer2• 16 years ago

Good job on crunching the numbers and making it profitable. Groupon is definitely a win-win in some cases.

Did the Groupon people help you with all this, or did you have to figure it out yourself? My main complaint is that Groupon doesn't seem to be looking out for the small biz owners and steering them toward successful deals. It sucks to feel like you can't rely on a partner to look out for your interests.

jojomagictime2• 16 years ago

GroupOn helped us a lot. They didn't really do much due diligence to see if we could handle the promotion. They did however tell us what to expect, showed us similar deals that had gone on across the country, told us to buy more phones and hire more people to work them the day of our deal. They basically told us to get ready for war.

Let me tell you. You have not known fear until you are on the receiving end of a GroupOn. Those people are animals. It was like the Mongol Hordes were coming to rape and pillage our business.

GroupOn is amazing. Like Andrew said, they breathed life into our business. We'd still be here, but they changed everything.

We get the money up front, breakage is insane. The promotion we ran in March, about 30% of people have redeemed their Groupons. And we have already had the benefit of sitting on alllll of that cash this entire time. They aren't the best customers, but they are pretty damn good. They buy things, they bring friends, they purchase 12 GroupOns and use 3 of them. GroupOn is great. These businesses complaining about being pillaged, they really have no one to blame but themselves. I am by no means a savvy businessperson, but to me this was a no-brainer.

Groupon’s Success Disaster

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