Groupon’s Success Disaster
blog.redfin.com
blog.redfin.com
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.
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."
I'm surprised Groupon doesn't do this. Or do they and this business just didn't set a limit?
"When I talked to Lucinda today, she asked if there was a cap on how many were sold to help protect the business from too much loss, and the simple answer is, no. When you sign up for Groupon, you are agreeing to sell as many as get sold."
FWIW, I don't believe this is what the coffee shop owner believes.
Disagrees: Banks are obliged to make a honest effort of preventing that from happening.
Agrees: another way to look at that is that, alongside the mortgage, banks do give financial advice. Part of that is answering the question "can I afford this?". If they ignore that, you could call that "lying or otherwise being fraudulent".
Beyond, that, though (and recognizing laws might differ), the bank is obligated to tell you what you "qualify" for, which may be drastically different than what you can afford.
The real grey area is in the tricks they can play with loans, and this is the point where "buyer beware" can certainly turn into "hang the SoB", depending on the behavior of the bank.
On the other hand, if the broker tries to push you into a loan that is more than you can afford or has bad terms for you (like that seven-year balloon payment), it is your responsibility to know whether you can make that work or not.
<rant> I really believe that a good portion of the reason we are seeing so many foreclosures is because people weren't willing to take responsibility for their actions. They left it to mortgage companies to tell them what the could do instead of looking at their own lives to figure out what they should do. </rant>
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.
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.
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.
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
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.
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.
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.
$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.
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.
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.
Retail is all about generating enough volume to cover fixed expenses.
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.
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.
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.
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.
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!
Distribution is worth paying for. Perhaps not paying a multiple of LTV for. But worth paying for.
(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 :)
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.
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.
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.
http://venturebeat.com/2010/09/15/demo-the-secret-of-groupon...
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.
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.
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.
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.
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.
I mean, that's a 100% cut with the business getting nothing. If that's serious, Groupon look unethical; if it's not, then the coffeeshop is lying (and others have doubted the sincerity of the figures, too, as well as their ability to run a business full stop). Either way my mind is slightly twisted to dislike Groupon now. Subtle!
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.
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.
Yeah, they're that valuable.
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.
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.
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.
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.
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.
The only thing that might be able to touch that
is some alcohol sales
How sweet this is for Groupon, they take it all with almost no costs at all...
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.
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.
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.
I think this is the best takeaway from the article generally (not focusing on the Groupon aspect).
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.
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.
Bashing your head against a brick wall hurts, but the solution isn't to find the least painful brick, it's to stop bashing.
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..."
> But this is exactly what a small business is buying from Groupon.
From the website:
Groupon for Businesses
With an unparalleled ability to drive hundreds - even thousands - of
customers through your door ... > Dishonest consumers are the problem here, though
> this is a problem that Groupon could do more to curtail.
If Groupon were to describe their subscriber list as such, then I could see their business start to decline, no?
It would be interesting to see what the average conversion-rate from one-time to repeat customer is based on Groupon coupons.
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.
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.
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.
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.
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.
Personally, I do think it's ok that a CEO is posting here, even if it is for financial gain. I feel like this site is like a tech-news link aggregator with a business spin. Having a CEO of any company is (I think) of value to the community since they can share their experiences in starting a company (it looks like Glenn Kelman was a co-founder of Plumtree as well).
In any case, if you disagree with the article (i.e., you think it's crud), then say why. Let's have the discussion. Complaining about it isn't going to get you upvotes, if that's your thing.
Take it easy. No harm, no foul.
Personally, I don't think it's ok that a CEO posts here for financial gain - I don't like that motive and I don't like in what direction it would take this site. I feel like this site is like a tech-news link aggregator with a entrepeneurial spin. I don't think it should be used by established businesses to boost traffic. Yes haveing a CEO of any company is of value to the community but only if they are here on merit, and not if they try to manipulate the community.
Like I have said again and again, it is neither here nor there if I agree or disagree with the article - the discussion I want to have is that I think this one: this guy when he submits 2 posts (written by himself on a corporate blog!) one day after another on topics that are guaranteed to cause a stir is cynically trying to boost traffic plain and simple. I don't want up-votes, I just think it speaks of the mob mentality and group-think on HN that you can't dissent or point something out like this without being down-modded.
I am taking it is. Thanks for taking so much time to respond. I hope you see my point of view. I don't see why I keep getting down-modded for it. You seem reasonable and if you say you feel this kind of thing is fine then I'll certainly take you opinion into account and I feel like you're the type of person who would extend me the same courtesy.
Phew!
In his defense, they have been two good articles so far.
He's got some really fabulous posts.
clistctrl says that he is okay with a company submitting their own content and that he found this particular entry to be interesting, and thought-provoking and he get up-modded.
I in my inimitable curt way say that I am not okay with that practice (I'm not okay with it, I think posts should be submitted independently or at least with full disclosure) and I state that I don't find it to be interesting and thought-provoking and I get down-modded.
What I want to know is - why is it not okay to express a contrary opinion? Why is taking an opposite stance in this case worthy of being down-modded. If you don't agree with me you can leave my post unchanged in value. But everybody who has down-modded me is saying that you don't want to see and won't tolerate dissenting voices. I haven't been rude, I haven't spammed, I've contributed some valuable comments and opinions in the past on this site. I'll say it again: SlashDot for all its warts was never like this.
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.
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.
Your posts that got downvoted were the short ones without context or value to the conversation. All of your posts that actually provide something to the conversation still have positive points (at the time of posting).