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Groupon’s Success Disaster

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Re: Groupon’s Success Disaster

#51

Post by pyre »

marcusbooster wrote: post #28
yock wrote: post #8

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.

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.

  > But this is exactly what a small business is buying from Groupon.
But this is not what Groupon is billing themselves as providing though...

Re: Groupon’s Success Disaster

#52

Post by hugh3 »

brk wrote: post #39
dailo10 wrote: post #27

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

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…

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.

Re: Groupon’s Success Disaster

#53

Post by reitzensteinm »

dzlobin wrote: post #41
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

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.

Re: Groupon’s Success Disaster

#54

Post by zaidf »

patio11 wrote: post #46
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.

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 :)

Re: Groupon’s Success Disaster

#55

Post by potatolicious »

pavel_lishin wrote: post #13
jlees wrote: post #6

Earlier quoted context omitted.

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 ex…

> 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.

Based on the author's blog post, the split was determined beforehand, but Groupon did not allow them to set an upper bound on coupons sold. This seems to be a recurring story - business owners willing to take a loss for marketing via Groupon, but with no effective ways of controlling an upper cap for this loss.

Re: Groupon’s Success Disaster

#56

Post by kareemm »

BobbyH wrote: post #35

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…

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

Re: Groupon’s Success Disaster

#57

Post by potatolicious »

xentronium wrote: post #17
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.

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.

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.

Re: Groupon’s Success Disaster

#58

Post by jcnnghm »

mediaman wrote: post #50
jcnnghm wrote: post #19

Earlier quoted context omitted.

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 margi…

If you are losing money on each transaction, you can't make it up in volume, you can only lose money faster. Your gross margin would have to be 75% to make money with a groupon promotion, without accounting for any of your fixed costs. The only thing that might be able to touch that is some alcohol sales, assuming you could control employee theft and shrinkage, which you can't.

Let us also not forget that a restaurant isn't infinitely scalable. If your tables are full of people using coupons, you can't just keep packing them in, eventually people are going to go somewhere else, and the guy that is going to leave isn't the one that already paid.

Re: Groupon’s Success Disaster

#59

Post by alanstorm »

brm wrote: post #5

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 - restauran…

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.

Re: Groupon’s Success Disaster

#60

Post by dgrant »

Marticus wrote: post #48
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.

Merchant should have taken into account #3.
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