Lessons from the Groupon Disaster

For me, it never seemed like you had too look past their basic business model to find dirty and scammy practices.

Their customers are small businesses, and the site's users are offered massive discounts, of which Groupon gets a large cut.

Small businesses do not want to be in a position where they are offering steep discounts in the first place without Groupon. Every day their incentive is to run their business to minimize excess inventory and price merchandise properly out of the gate, as well as stock the correct merchandise, -all so that they can limit merchandise going on sale, and if it does, limit the discount at which it does, in order to retain the highest possible margin. While you can illustrate exceptions, this is generally true.

So that being the case, Groupon comes along and tells the merchant essentially that they want half of the margin on products that the merchant is trying hard not to put on sale, and not to discount steeply when they do, and oh by the way, they want the merchant to massively discount that merch before they take their half.

It isn't hard to see why that model creates structural incentives to produce scammy behavior like inflating prices specifically for a Groupon so that the discount isn't really a discount (or if it is, much less than advertised). That's just for the consumer. The structure also gives incentive to Groupon sales people to engage in scammy behavior, pressuring small businesses to sign up for a service where the value proposition is often very small, non-existent, or worse, negative.

Groupons can be effective for small businesses, but when your model is selling users massive discounts by slashing margins, and then taking a massive chunk out of that slashed margin...well...it certainly set my radar off at the beginning when I first heard about them.