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Thursday, June 23, 2011

Groupon Is A Scam

This series of techcrunch articles was interesting. It's a detailed analysis of Groupon. They explain why it's one big scam.

With Groupon, small businesses advertise special deals. The deal only occurs if enough people buy it. Products are discounted 50% or more. As a fee, Groupon keeps approximately 50% of the payment. Do you see the problem?

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The small business is discounting product by 50% *AND* they're paying a fee of 50% to Groupon. That's a discount of 75% or more. Most small businesses have profit margins of no more than 10%-20%.

That article gives an example. Suppose you approached a small business owner and asked him to spend $50k+ on advertising, for customers who would come to his story once and probably never come back. The owner would refuse. However, if you add up the costs of the Groupon discount, it's equivalent. Instead of paying the fee all at once, you gradually hemorrhage money as customers redeem their Groupons.

Here's a typical example. Suppose your product normally sells for $20. The Groupon price would be $10. Of that $10, $5 is paid as a fee to Groupon. With a 75% discount, that's throwing away money.

Google now has a program called "Google Offers", which is similar to Groupon. They advise businesses to tell their regular customers about the offer. If your regular customers take the Google Offer or Groupon, you're throwing away 75%+ of revenue! You would be an idiot, if your regular customers take the Groupon or Google Offer.

It might be worth it, if the Groupon helped you get new returning customers. However, conversion rates are very low. Most customers show up once and never come back. It's probably inferior to traditional forms of advertising.

The Groupon is only worth it if your product is overpriced junk. A restaurant can't afford the 75% discount. You would have to offer a "Groupon burger" that's 1/4 the size of normal, or other similar trick.

Many Groupon businesses have low computer skills. They lack the ability to prevent people from double-redeeming Groupons. That leads to further problems.

This article was interesting. Groupon's TOS is ridiculously one-sided biased in favor of Groupon. That is further evidence that only idiots sign up for Groupon.

Groupon's TOS gives you no control over when the offer runs. For example, suppose you own a restaurant near Yankee stadium, and decide to run a Groupon in December. Groupon can sit on the offer until April and run it during baseball season.

Groupon's TOS has a exclusivity clause. It's one-sided. You're barred from other online ads until your Groupon runs. However, Groupon can run offers from your competitors. If Groupon's lawyers enforced the contract as written, you're barred from *ALL* online advertising until the Groupon runs. For example, if you mention a $1 discount on your website, you're violating Groupon's TOS. If Groupon were malicious, they could sign people up but never run their ad. Then, the business would be forever barred from online advertising.

Why does Groupon get customers? They are appealing to businesses emotionally rather than logically. A logical analysis of Groupon fails. "I'm offering a 75% discount? There's no way I can make money off that! If a lot of people take the offer, I might be bankrupted!"

However, an *EMOTIONAL* analysis of Groupon works. "Groupon is cool! By participating in Groupon, I'm an awesome Internet-savvy business owner!" Groupon gets customers, because idiot small business owners do an emotional analysis rather than a logical analysis.

Allegedly, Groupon's salesmen use emotional high-pressure tactics. That's further evidence that Groupon is selling based on emotions, rather than based on logic.

There's another interesting aspect to Groupon. It's a loansharking service. You get a cash payment from Groupon upfront, but you don't incur the expense until customers redeem their Groupons. However, most customers redeem their Groupons quickly.

If your business is almost bankrupt, then Groupon is a good deal! In fact, the article says that Groupon only makes sense for a nearly-bankrupt business. You can take the Groupon upfront payment, then default and declare bankruptcy!

Groupon's goal is to create hype, rather than a truly valuable business. By having lots of hype, Groupon can trick gullible small business owners into signing up.

There's a Ponzi aspect to hype-based Internet businesses. By creating hype, Groupon's insiders can keep raising capital at ever-higher valuations.

This article was interesting. Groupon raised $946M in January 2011. However, only $136M of that went to Groupon. The remaining $810M was insiders selling their shares. That should be a huge red flag, when most of a financing round is cashing out insiders. It seems the insiders know that Groupon is a scam, and are cashing out as soon as possible.

Sarbanes-Oxley was a bad law. That bad law is a huge regressive tax on public corporation. Corporations are deciding to stay private longer, rather than have an IPO. However, just because a corporation isn't public, doesn't mean you can't buy their shares. There are OTC invite-only markets, only open to "accredited" (wealthy) investors, where pre-IPO shares are traded.

People are creating "special hedge funds", where these pre-IPO shares are traded. Goldman Sachs did that with FaceBook. That's a loophole to get around the "500 investors max" rule. In fact, there is talk of loosening the regulations, for how pre-IPO shares can be traded. That is amusing. Sarbanes-Oxley made it harder for corporations to go public, by imposing a huge regressive tax on public corporations. Now, "hot startups" are staying private and having their shares traded in shady OTC markets. In turn, this leads to more regulation! It's the usual "Problem! Reaction! Solution!" Politicians are trying to regulate this pre-IPO trading, without realizing that the Sarbanes-Oxley law made it harder for corporations to go public!

Groupon is based on hype, rather than logic. Groupon's salesmen use emotional bullying, to trick small business owners into signing lousy deals. Groupon's insiders are cashing out their shares at ever-increasing valuations. They are exploiting the Ponzi opportunity created by Groupon's hype.

Groupon is one big scam. They need a steady stream of gullible small business owners, or businesses peddling overpriced junk. They rely on Ponzi hype to keep raising capital at ever-increasing prices. A logical analysis of Groupon shows it's a scam. However, by using psychopath skills and appealing to emotions, Groupon tricks investors and small business owners.

20 comments:

Anonymous said...

Other than the alleged restriction against other advertising (which I have not seen enforced), what you are calling a scam is simply the right of free will and personal decisions.

A scam is a swindle. This clearly does not apply. The business go into this with their eyes open, the consumer has the option of obtaining a refund from Groupon.

DO I work for them, no. Do I own stock, no. I just hate unfounded rants that can damage any person or firm.

FSK said...

Are you working for a PR firm employed by Groupon.

"I just hate unfounded rants that can damage any person or firm." Seriously, if Groupon is harmed by this post, then they have big problems.

Stealing via fraud is still stealing. Groupon is stealing from businesses and employers. I'm sure Groupon's salesmen don't help the business calculate how much money they will lose per Groupon redeemed.

The fact that Groupon is stealing leaves less capital for other businesses. People would rather invest in a business with good hype, than a good investment.

cyphyr said...

In most case what you say is probably true but from speaking from the customers viewpoint all I can say is that I have just bought two tickets to "The Godney Gathering Festival" (google it) for £10 each (should have been £20 each). Among others playing are Reef and Toploader. Sounds like a good deal to me. I guess they will make their money on the bar!

thewendster said...

Hi,

I am a 3rd year medical student at UB. I just discovered this morning that a sale posted on the groupon website for Buffalo, NY was a scam, with falsified information by the company Groupon. The sale is for 2 dozen small teiku point oysters shipped live within U.S. The price is listed as $44, supposedly a 53% discount from the list price of $93. I went to the company website and priced out the exact same thing, with the shipping estimation from Washington State (where the Hood Canal Seafood is located) to my home in Buffalo, NY. The total price? $44. I have included images to support my claims. I wonder how many of Groupon's other "deals" are falsified. I have sent an e-mail to Groupon alerting them to the problem.

http://imageshack.us/g/695/mygrouponcomments.jpg/

Wendy

C _Harris said...

Its amazing how many people in the blogosphere world bash these daily deal sites. I think the bigger issue is that there is nobody looking out for the merchant in these deals. These big companies (goupon, living social, etc.) don't care about the merchants, they just care about the return on the deals.

I come from the merchant side of this mess and just worked with this new company called Stampede (www.jointhestampede.com)

These guys act as your daily deals agent and place your deals with the right daily deal company for your business. You can better control the timeframe in which your deal runs and they handle all the legwork, with no additional cost. If your a merchant sick of the BS from the big companies, check these guys out.

Andrew Teal said...

I agree that some of the merchants may be feeling the pinch for these kind of Deals by the Deal companies where the merchants end up getting 25% of the value of their service/products. But one need to understand that some merchants desperately need more traffic for the business and this marketing technique is definitely the most effective one and has an edge over any other marketing technique. As per one of the survey, 40% people come back to the same business where they have availed the discount and that make lot of sense for those merchants. Some merchants run these advertisements periodically and that proves their need for these kind of marketing.

As far as getting just 25% of the actual value for their products/services are concerned, I offer an explaination. For a Deal, it looks like they loose $5000 and get 500 customers. If they advertise on a newspaper, radio, TV, billboards, they may end up spending more than $5000. Who is going to guarantee a traffic of 500 customers???

Anonymous said...

Don't be dumb you idiots. It's a marketing tool. You offer services cheap which hooks people in to use them again for full price. Example - I bought an acupuncture voucher now I have acupuncture regularly for full price. II mean duh how dumb can you people be. It also employs the obligation principle. Give people something for virtually nothing and they feel indebted to you. It's actually very clever unlike you lot.

FSK said...

There's one important point I'd like to make.

Many people are aggressively defending Groupon. None of them are my regular commenters.

This post ranks highly in Google now.

I strongly suspect a PR firm hired by Groupon is planting pro-Groupon comments here.

Anonymous said...

Wendy,

If you went to that website from groupons page, the website knows this and gives you the "groupon price". Not a scam.

As for the entire article written here, I don't see a problem. It's not like groupon is lying about anything. Thy are telling you all the upfront costs. If that business needs groupon to calculate their loss/profits, well that's their problem. Groupon isn't their babysitter.

In the end, Groupon is not a GOOD DEAL (I did not say scam) for small businesses in general. But they have many other deals for major brand name stores as well. I can think of MANY other advrtising schemes that are not good for uncle jo's pizza or some other local small business. As an example, they probably should not run an advertisement during the super bowl. But if they did, is the network scamming them? No.

Dr. Robertus Laser And Cosmetic Clinic Team said...

Thanks for your article. I always recommend people to stay away from groupon, it damages service industry. Groupon is a middleman, a broker, but very expensive one. Think of a real estate agent which takes 50% commission. Unimaginable? Groupon is that agent.

Groupon and other "group buy" sites take 40-50% of revenue from the vouchers they sell. So when you buy an offer like $99 for 20 units of botox that means that the business will only get $49.50 and this comes to $2.47 per unit, which is massively below the cost of Botox alone. Forget the cost of labor and other operating expenses.

When you, as a business, buy something for $5 and sell for $2.47, you are clearly at loss, so, as a business you will either flip and stop honouring coupons or pressurize your clients with up-selling tactics. If clients will not be responsive to pressure to paid more, it is in the interest of a business to get rid of such a client as soon as possible. It could be done by low level of service, rudeness, inefficient service etc.

Alternatively, the "groupon service" can be provided at ineffective levels, so the "full-price service" can be justified later. This is often seen in laser hair removal coupons, when first 6 sessions are discounted with groupon but they are done (by the business) at low energy levels, so the hair did not disappear. This justifies "additional sessions" for a full price. Needless to say, this is a waste of time both for consumers and for businesses. This tactic also may be dangerous to health as there is excessive and unnecessary exposure to the hair removal procedure.

Bottom line: buying from groupon will cost you time, frustration, low service level, and, at the very end, more money (in case when you really want to do what you bought from groupon). buying directly from businesses is a wiser choice.

ER said...

Beware of groupon, it damages service industry. Groupon is a middleman, a broker, but very expensive one. Think of a real estate agent which takes 50% commission. Unimaginable? Groupon is that agent.

Groupon and other "group buy" sites take 40-50% of revenue from the vouchers they sell. So when you buy an offer like $99 for 20 units of botox that means that the business will only get $49.50 and this comes to $2.47 per unit, which is massively below the cost of Botox alone. Forget the cost of labor and other operating expenses.

When you, as a business, buy something for $5 and sell for $2.47, you are clearly at loss, so, as a business you will either flip and stop honouring coupons or pressurize your clients with up-selling tactics. If clients will not be responsive to pressure to paid more, it is in the interest of a business to get rid of such a client as soon as possible. It could be done by low level of service, rudeness, inefficient service etc.

Alternatively, the "groupon service" can be provided at ineffective levels, so the "full-price service" can be justified later. This is often seen in laser hair removal coupons, when first 6 sessions are discounted with groupon but they are done (by the business) at low energy levels, so the hair did not disappear. This justifies "additional sessions" for a full price. Needless to say, this is a waste of time both for consumers and for businesses. This tactic also may be dangerous to health as there is excessive and unnecessary exposure to the hair removal procedure.

Bottom line: buying from groupon will cost you time, frustration, low service level, and, at the very end, more money (in case when you really want to do what you bought from groupon). Buying directly from businesses is a wiser choice.

FSK said...

Don't give the same comment from 2 different Blogger IDs. I have "comment moderation" enabled, and only check once a day.

Anonymous said...

This group-thing will implode on its own.. here's the sneak peek:

http://techcrunch.com/2011/08/10/groupon-lost-more-than-100-million-last-quarter-as-hiring-costs-jump/

Anonymous said...

SCAM! SCAM! SCAM! SCAM! 1 second ago

Groupon are a scam!! They are offering IPL laser hair removalyesterday and today the same deal, 6 sessions for £99 instead of £350, thats £251 saving 72% discount. WRONG!!! I could have got this deal even if Groupon didn't offer this on their site and sometime ago and even TODAY!

Having researched the company, EUROLASE, offering it, I came across a GUMTREE AD, from EUROLASE offering the same!! So how on earth can Groupon say they are giving us the customer a discount when there's no discount there????? It's a scam!!!!! I even called the company and some woman who can't even speak clear and concise english was happy to offer me the deal on Gumtree!!!! Groupon are not saving us money with back street companies like EUROLASE!!!!!!!! Why would any company post an AD on Gumtree unless its a back street one?!?!? This has definitely opened my eyes and I will definitely be doing my research before I buy any offers!!!

Oh and 1 last thing this same company offered the same deal Groupon has at the moment for £59 with KGB last week, Yet AGAIN it wasn't a 80% or 90% discount they were saying because I could have got it for £99!!!! They are all scammers!!!!!!
IF THIS ISN'T A SCAM THEN WHAT ELSE IS IT?????????????

Anonymous said...

Food cost around 20-30% 75% discount, yes you are not making much but the value of getting customers through the door is invaluable, this is today's marketing at lower risk, breaking even on a marketing campaign that hits groupons customer base is not a scam. Also it's marketing so up to a certain point it is a tax write off, do your research...

Anonymous said...

Groupon Australia are extremely difficult to deal with. They don't answer the phone & you can't leave a message as message bank is full. They do not reply appropriately to emails but prefer to fob you off with a standard template reply; signed with love from Groupon!
After a massive attempt to have a legitimate refund processed, I've been forced to resort to lodging a complaint with Consumer Protection! No-one should support this company ~ there are plenty of businesses who do the right thing that we should support instead!

Anonymous said...

You don't get the point. The point:

You create deals so that in the future you can have returning customers. The idea is not to make gobs of money on one day and then never see the people again. So you do actually get in the red on a high flow day. Anyways, do you get it? lol

VeeVee said...

You will probably think I am a hired Groupon-goomba but I am going to post my opinion anyways...because there wouldn't be any point to your post if there weren't both sides to the story.

I love Groupon and have yet to have a bad experience. I find a lot of things on there that have been very useful to my family and I. For instance last year they had a deal
for Old Navy, pay $10 and get $10. I was able to do all of my shopping for my family and not use a credit card or go bankrupt. There are also other deals for restaurants that I have bought and been able to use for a special occasion or give as a gift.

Just as the consumer has the right to purchase a Groupon, the company offering the Groupon has the right to list their product. I don't think Groupon is going out to these companies and threatening them to do business with them.

I live in a small town and there are a lot of people that have gotten their business/referrals out w/ Groupon and Living Social.

I am also a return customer to the places I purchase my Groupon's from if they are good. I recently purchased one for a steakhouse for my husbands birthday and I have returned there 3 times in the last 2 months because they have exceptional food...and before the Groupon was offered I had never even tried the place. If you are a good company w/ a good product and customer service people WILL return.

I do not however know how it feels to be on the business side, but you can't tell me that these merchants don't know what they are getting themselves into when they sign up. Every middle man has a commission, that's common sense. I have even seen the same small business have their services offered a couple of times.

I will continue to use Groupon and/or Living Social, and if I receive a bad product then I will write a review about it. I am not biased, just enjoy getting a great deal as do most people.

Shawn Irwin said...

Groupon has been one of the best e-commerce site in providing daily deals,voucher and discounts at unbelieveable prices.Also it attract large number of customers throughout the holiday season.
groupon software clone

Anonymous said...

The argument is flawed. That simple. Would i rather spend a few grand in advertising with no guarantee or spend a few grand in products and services to guarantee new faces in the door. I have i have a good sevice they will come back.

Do your research people on statistics and numbers in advertisng...


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