Why Groupon Destroys Your Business

Andrew Mason, founder and CEO of Groupon, has earned enough money to retire. He sold most if his Groupon shares and with an accumulated deficit of $522 million, Groupon partners are starting to abandon the ship.

The great article by Dieter Petereit of the German based technology magazine T3N analyzed Groupon’s business model and showed why Groupon can destroy your business and is not sustainable.

Here’s a short overview of his thoughts:

Economical Point of View

Offering discounts is only worthwhile from economical point of view if you:

• have bought products in large amounts and need to get rid of over capacities (you bought a large amount of products and received a great price for the large amount)
• if you need to get rid of your stock (e.g. seasonal sale)
• if your products are shortly to expire (your loss is smaller if you offer discounts)

In these cases the customer is aware of the reason for the discount. A Groupon Deal mostly has no clear reason for a discount. The customer perceives the price offered as given and uses this price as price anchor. He will hence forth expect this price as reference price. Groupon’s argument of generating loyal customers is therefore not valid, since Groupon customers will only search for deals in this price region.

Additionally

• if you have to serve a client with a coupon, you will not be able to serve a customer who is willing to pay the full price (e.g. if you are a self-employed hairdresser)
• your full paying customers will be put off by the price he’ll have to pay, while next to him everyone has received a 50% discount; consequently you will either loose that customer or he will be only coming back if he also receives a 50% discount.

How does Groupon work?

• As company you offer a discount (around 50%) on your normal price and publish it on Groupon
• If enough people buy the coupon you have to split the earnings with Groupon 50/50

So if you offer a meal for $10 you receive $2.50. T3N states that many offers come from catering businesses. This market has low margins and is especially vulnerable towards deficits. You might receive an exquisite dinner for a low price. First, for this price the restaurant is likely to make a deficit and second, eating at price of a McDonald’s lunch really doesn’t fit your reputation. The people you attract will probably not be the clientage you are looking for.

With the increasing volume of companies offering Groupon Deals the price spiral ascends downwards, setting the reference price at a  low rate. This on the other hand will force companies to back out of Groupon, since they will not be able to survive (Boston has already seen a decline in businesses using Groupon). This fluctuation will force Groupon to further acquire new partners in order not to lose their money flow or Groupon will need other money resources.

The question might occur, why is Groupon on its way to file  a $750 million IPO?

Here’s a good example of a small business that almost lost everything due to Groupon

And here are some great stats on how often Groupon-ers come back for a full purchase.