I think the big problem is that it was a bad deal for most vendors except for very high margin ones. When places like restaurants realized that it wasn't getting them repeat business and the deals were dominated by stuff like Day spas it kind of collapsed.
I agree, it's probably a terrible deal for almost every retailer, especially small businesses.
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.
You've just described the main dynamics involved, with one key part left out.
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."
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.
Interesting. My memory of the subject is pretty out of date by now, as I don't follow Groupon much, but I'm certain that's how it worked during its hypergrowth period.
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.
Yes, UK here and I didn't follow the later progress as after being propositioned (early in the Groupon era) as a mark by them I pretty soon decided it was far from being good for the business I was in at the time.
Good follow up, thanks.
I wonder why they took those differing approaches - regulatory pressure?
It can still make sense if you have low marginal vs fixed costs. I know restaurants that are happy to use them to fill up time slots when they're usually empty¹. Since most of their costs are fixed (rent, salaries, etc), they still make a profit at the margin.
¹ I don't know about Groupon, but other deal sites allow them to put certain conditions on the use of the voucher
This is particularly true for businesses that offer things like yoga classes, for whom the marginal cost is ~0. This is obvious to everyone now, but early on most small businesses didn't think of Groupon as what it is: a form of marketing that requires a fairly particular cost structure to be cost-effective.
I did an analysis of the best deals in the early days of Groupon, and they were all classes that were better when attended with friends. (I think the best selling one in the early days was a cupcake baking class.)
One problem early on was Groupon wouldn't allow the limitation of numbers of "deals" sold. That put some people out of business. The people running Groupon were acting well beyond the bounds of morality. IIRC they did correct that after some bad press.
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.
Seems to maybe work well for things like yoga classes also. If the class isn't full then that's unused space that you can give to an interested consumer for basically free with a daily deal (and hope they become future subscribers). But that's about it.
Yeah, I've run high margin deals before and even those aren't really worthwhile. For it to be successful you have to be fairly sophisticated with your methodology, and most small business owners (the people who tend to use Groupon the most) just aren't that sophisticated in their setup.
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).
I think it's also important to keep in mind when Groupon was founded and started getting big: 2008.
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.
