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.