As I recall, the standard deal with Groupon etc is 50% off retail price, then Groupon (or whoever) takes 50% of what's left.
So consider a product or service you usually sell for $100, which costs you $40 to deliver. When doing one of these deals, you're now selling it for $50. You get $25 of that, and the platform operator keeps the other $25. So your cost of sales was $40 and your revenues were $25.
Fine if you're happy to operate a loss-leader to attract quality clients who will return to you at full price later.
Unfortunately it seems that these daily-deal services often attract low-quality leads to your business. The kind of customer who exhibits no loyalty, and simply surfs from company to company taking advantage of these loss-leader deals, then never returning.
The vendor would realize the revenue up front, when all the "coupons" would be sold. Then they would fulfill the orders over a period of weeks or months, with some sort of breakage rate involved. Needless to say that put the incentives of the buyers and sellers in tension.
But overall the main model was not really just a simple loss-leader approach, it had a lot in common with loan sharking.
"Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days."
-http://www.wsj.com/articles/SB100014240529702043580045770279...
Certainly in the past we were "offered" the opportunity to do a 75% off deal. Then IIRC it was 60-40 in their favour. They got all the breakage (payees that didn't turn up) and we had ty wait until the end of the deal period to apply for the money.
It was as close to a con as you could get. Like selling pensioners ludicrously expensive fascia boards and guttering when what they needed was their gutters cleaning.
Groupon knew the business it was good for but seemingly marketed to those with little financial nous. They promised winning repeat custom on the one side and cheap one-off deals to the end-customer on the other.
IMO some version of this could have been good for businesses in my sector but it would require the company not to be greedy. Investors don't go for those companies.
Indeed, it appears that we're both correct, assuming you're not in the US. Interesting article from 2012 sheds some light:
Some context about how the company operates: Groupon has had two very different payment structures. In what I call the American model, merchants receive cash upfront for a deal. Once the deal is closed, Groupon tallies up how much it owes the merchant and sends them the money in installments, with the vast majority of the money delivered within 60 days. If a Groupon isn’t redeemed, the merchant gets to keep the money. (Known in the industry as “breakage.”)
Outside the U.S. and Canada, Groupon has used a different scheme. For simplicity, I will call that the European model. In this scheme, Groupon only pays merchants when a Groupon is redeemed; merchants do not get cash up front. If a Groupon isn’t redeemed, Groupon gets to keep the money. Breakage is considered to be 20-25% of Groupon purchases, so this amount is significant.
There are exceptions to the above. I know of one popular merchant in Europe that negotiated to get the American model. But this is largely how it works.
http://venturebeat.com/2012/08/15/the-giant-red-flag-that-an...
Good follow up, thanks.
I wonder why they took those differing approaches - regulatory pressure?
¹ I don't know about Groupon, but other deal sites allow them to put certain conditions on the use of the voucher
The money lag also killed some small businesses who had assumed they'd get money at the pos to cover their costs and hadn't accounted for increased custom needing greater spending on inputs when money was locked up for 3 months. Cashflow interrupts easily kill a small (micro) business.
Maybe it's more accurate to say 'the people who easily fell for Groupon's sales people'. In my area the various daily deal sites have very aggressive sales fleets, who literally go door to door in shopping streets convincing owners to put up a deal. Many of them lose money or barely break even; but then again some of them owe it to themselves (I bought a deal once and went back afterwards; she then said 'I'll give you the same price you paid for the groupon, because other customers have complained that they didn't think it was fair they had to pay more when they came back' Wtf?)
Anyway, I don't have exact data of course, but I've been interested in the business model for years, so I tried to get as much information from business owners as I could every time I bought a deal. The overall picture I got even after a few years (so since 2010-2011 maybe?) was that the typical groupon customer had distilled to the cheapskate vendor-hopping type (before that, when groupon was the hot new thing, it was mostly early adopters who weren't really price sensitive, but for whom getting a 'deal' was more about the social validation aspect of looking like a savvy consumer).
Everybody was suffering and cutting costs. I don't think it was so much as wanting to be price savvy, but rather, wanting to go out and not being able to afford it.
Groupon actually stemmed from a different startup that was supposed to be about something like community building. (The name alludes me, but I used to work for the "parent" company of Groupon and in the same offices as it was getting big. That startup never materialized, but the one they did was got a campaign that if they got x number of people, Motel Bar (which is bar in the same building) would give a deep discount. Andrew Mason, Eric Lefkowsky, Etsy al, quickly realized that that was a real business model, pivoted, and exploded.
Had it been in a different when people were not so price conscious and businesses were not on the edge of going bankrupt, I'm not so sure it would have done as well.
The businesses in that space that seem to still be going strong (see Gilt for example) tend to focus on more luxury items/markets, where they're either selling factory seconds (in the case of retail) or experiences that will likely target a higher class of consumer and will bring them back.
Their concept of the "campaign" became the cornerstone modeling concept for the Groupon platform.