The Groupon Backlash: It's the Business Model, Stupid

Last week, we noted the growing backlash against the mighty Groupon by businesses (and employees) who are starting to think that Groupon's offerings aren't so great. More plainly: some believe Groupon and its clones should all be destroyed.

Of course, it's not that Groupon is tricky; we haven't heard the company accused of obfuscating its terms. The problem is that businesses sign on with overly rosy ideas of the return they'll get for their investment. Groupon often takes half of the money of a coupon offering for itself, and, with a 50% discount, leaves the business selling its goods for 25 cents on the dollar. This blog post by a Portland bakery owner describes the financial carnage that can ensue after a business enlists Groupon—an ironic (is that the word?) situation in which the more they sell, the more money they lose.

The problem here does not seem to be that Groupon is unethical per se; it seems to be that many small business owners still aren't aware of the perils that they could face by enlisting in the coupon game. Spreading the word, therefore, seems like a social good. Here's what one former owner of a struggling California spa told us about her experience with Groupon:

I had heard of groupon by reading about it in USA Today months before they launched in Sacramento area. They contacted me to run a deal. That turned into a 2-week long negotiation back and forth on what to offer. It had to be less than half price, then they were taking their half of that. The numbers all seemed screwy and the negotiations turned into some serious arm twisting. I reluctantly settled on $35 gets you $80 in services. My cut was $17.50.....I had to then pay staff the usual 50% commission on the $80 plus supplies, like wax or hair color. Of course you can imagine that it turned into every redeemed groupon cost me serious $$.
These are my major problems:
I was concerned about coupon chasers and groupon swore that their base was rich women 20 to 40, people that will become new loyal clients....turns out we had the craziest coupon chasers, scammers, no tippers, etc...to the point of absurdity
I sold 379 of these things...I was given a check up front for about $2k which I used immediately to pay my rent...lots of front end promises with major back end clean up and costs
I see groupons every other day that are completely un-doable if you do the math....
I ended up with about a month long run of groupons and I ran out of money and had to pull the plug on my business.

Sad! Still, caveat emptor, right? Always do the math first, etc, etc. Groupon isn't the only company of its sort. Along with LivingSocial, there are many, many competitors trying to make their own niche in the suddenly hot coupon biz. That translates to lots of sites on the prowl for small businesses to sign up. That translates to lots of peril for small businesses that don't do their homework.

We got an interesting (scathing) email from a writer who'd written for Groupon knock-off sites. She emphasized that the predatory, fly-by-night nature of some of those sites had the potential to "do a ton of damage" to small business owners who reckoned "that going with a 'little guy' is a safer bet."

Groupon and every clone depends on gullible merchants, and even more gullible deal-seekers. The number of times when, as a writer, I attempted to polish a turd and make a terrifying, two-star-reviewed pizza joint look like somewhere that $20 for $40 was actually a good idea, is outrageous. These companies knowingly poach businesses that are awful, because they are more likely to agree. High-end places and spots with savvy owners know that the numbers just don't add up. Rather, Groupon and its ilk go after businesses run by non-English speakers and those who barely have a web presence. The ad writers are instructed to comb the annals of the internet to find anything they can to describe these businesses, often lying or going off Yelp reviews to glean content for the copy. The deal terms themselves are often unclear, both to the writers and the sales reps, and the unwitting merchants are surprised by the expectations of consumers...

I will be exceptionally excited to see the end of this business practice. It is unprofessional, rife with dirty deals, and employs a lot of writers at much less than they're worth.

It's the business model, stupid. Buyers beware. Have any illuminating Groupon stories of your own to share? Email me.