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Groupon’s Success Disaster

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Re: Groupon’s Success Disaster

#41

Post by dzlobin »

reitzensteinm wrote: post #23

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…

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

Re: Groupon’s Success Disaster

#42

Post by GlennKelman »

danilocampos wrote: post #14

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 me…

#3 is just brilliant.

Re: Groupon’s Success Disaster

#43

Post by qasar »

noodle wrote: post #31
qasar wrote: post #12

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? al…

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?

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.

Re: Groupon’s Success Disaster

#44

Post by MicahWedemeyer »

danilocampos wrote: post #14

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 me…

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.

Re: Groupon’s Success Disaster

#45

Post by reitzensteinm »

jlees wrote: post #40
reitzensteinm wrote: post #23

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…

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.

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.

Re: Groupon’s Success Disaster

#46

Post by patio11 »

zaidf wrote: post #9

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…

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.

Re: Groupon’s Success Disaster

#48

Post by Marticus »

danilocampos wrote: post #14

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 me…

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.

Re: Groupon’s Success Disaster

#49

Post by qasar »

qasar wrote: post #43
noodle wrote: post #31

Earlier quoted context omitted.

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?

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…

hint hint: there's a startup in there somewhere :)

Re: Groupon’s Success Disaster

#50

Post by mediaman »

jcnnghm wrote: post #19
vaksel wrote: post #2

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.

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 flo…

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.

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