Groupon crashes and burns

[Puppycow]

If you thought Facebook's IPO was a bust, consider the poor fools who invested in the Groupon IPO:

Groupon Now Down 78% From Its November IPO Price

Quote:

Yikes, after Groupon reported its second-quarter revenues, the company's shares have nosedived in after-hours trading. As I write, the share price is down to $6.15, or 78 percent off from its IPO price of $28.

Of course, Groupon insiders have already cashed more than $800 million out of the company, so perhaps they aren't so worried about the company's current performance.

Now some people are dancing on its grave:
Ding Dong, Daily Deals Are Dead

Quote:

The thrilling demise of Groupon’s crummy business model.

By Farhad Manjoo | Posted Tuesday, Aug. 14, 2012, at 6:19 PM ET

A year ago, Rakesh Agrawal, an analyst and journalist who spent many years working in the local advertising business, wrote a series of devastating articles about Groupon. At the time, the digital coupon firm was regarded as one of the most brilliant Internet advertising companies to come along since Google. In fact, Groupon was so hot that Google itself offered $6 billion to buy it—but Groupon decided it didn’t want the search company’s billions and instead prepared to raise many billions more in a stock offering. Now, just before the IPO, Agrawal was calling Groupon’s entire business model into question.

“Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business,” Agrawal wrote, and the critique got more scathing from there. To you and me, Groupon seems like an easy way to save money on spas, auto detailers, chiropractors, and lots and lots of people who want to remove hair from your nether regions using wax or lasers. And to many investors, Groupon seemed like a sure thing. In 2008, its first year of operations, the company booked $94,000 in revenue; by 2011, it was collecting $644 million per quarter, leading some to call it the fastest-growing company of all time.

But as Agrawal described it, Groupon was riding high because its most important constituency—the small businesses who slashed their prices to entice Groupon’s customers—was getting ripped off. When Groupon runs a deal with a local business, it demands very unfavorable terms. First, the merchant is asked to substantially reduce his prices. Then he has to agree to give Groupon a huge split—often 50 percent—of the tiny amount that he does make from each Groupon sale. For instance, if my fast-food shack normally sells a burger-and-shake combo for $10, Groupon will want me to offer it for $5, and then take half of the $5 sale—so I’ve just sold $10 of merchandise for $2.50.

I guess the lesson here is to beware of trendy new companies unless you really know what you are doing. A few have worked out pretty well, like Google:

Quote:

After the IPO, Google's stock market capitalization rose greatly and the stock price more than quadrupled.

I remember that Google did once make an offer to buy Groupon before their IPO. I guess they dodged a bullet on that one considering subsequent developments.

[BenBurch]

Mechants I have talked to hate Groupon. They lost a lot of money on trying to use it for promotions. The "customers" you get in rarely return. So, really you only get any particular merchant ONCE and they won't come back to Groupon. There is a sucker born every minute, but word gets around.

[timhau]

Originally Posted by Puppycow

I guess the lesson here is to beware of trendy new companies unless you really know what you are doing.

I'm inclined to think that it's the other way around -- if you really know what you're doing, you don't invest in trendy new companies. Especially ones that can't get their accounting straight (and yes, there are shareholder lawsuits pending).

[Puppycow]

Originally Posted by timhau

I'm inclined to think that it's the other way around -- if you really know what you're doing, you don't invest in trendy new companies. Especially ones that can't get their accounting straight (and yes, there are shareholder lawsuits pending).

Wow. And off another 27% in today's trading. Ouch.

[Corsair 115]

Originally Posted by Puppycow

I guess the lesson here is to beware of trendy new companies unless you really know what you are doing..

Er, wasn't that lesson amply demonstrated about twelve or so years ago?

[kevsta]

Dotcom v2.0 has 3 engines on fire and is losing altitude fast..

[timhau]

Originally Posted by Corsair 115

Er, wasn't that lesson amply demonstrated about twelve or so years ago?

Sure, but the current brave young eagles of Wall Street were just moving to Junior High back then.

[jargon buster]

The whole scheme was flawed.
I bought some vouchers for a hotel stay and when I rang the hotel to book they told me that there were no available rooms that weekend as they were fully booked and that they only had a tuesday Wednesday availability.
I called them back ten minutes later and tried to book without a Groupon Voucher and low and behold they had lots of rooms available.
I informed her I was the "Groupon guy" from earlier and she went quiet and booked us in on the voucher.
I dont blame the hotels doing this as they have clearly been on the wrong end of a bad deal with Groupon and dont wish to book people in when the opportunity still remains to get a frull price customer.

[Eddie Dane]

I never understood the merchants using Groupon.

To me, it seemed glaringly obvious that the Groupon deal would lose you money and the customers would just move on to the next Groupon deal and never return.

[stilicho]

Originally Posted by timhau

I'm inclined to think that it's the other way around -- if you really know what you're doing, you don't invest in trendy new companies. Especially ones that can't get their accounting straight (and yes, there are shareholder lawsuits pending).

That's the biggest issue and not so much the business model. Hand in hand it makes for a horrible investment decision.

Now let's go back and look at Facebook too. We haven't seen anything about accounting fraud yet but their claim to having a billion unique users is certainly close. I think they'd have trouble proving they have a tenth that number and the onus is upon them.

[kookbreaker]

Groupon, until recently, was almost always calling me (they or their various agents) to try them out and arrange deals. I never could see the percentage. It would make some sense to companies who have products with large, fat margins on their products. But I don't have such products in my little science store. They put on a fair amount of pressure but I held off as I just couldn't see the ROI. I am somewhat satisfied to see that it was a house of cards they had built.

Even worse is that there were dozens of little Groupons running around locally and nationally. The model just didn't make sense to me.

Oddly enough, Google has been beta-testing their own Groupon-lite, which is more about smaller deals with the customer. A free ite with purchase of $X dollar, for example. That had more viability in my eyes and since it didn't cost anything in the beta I didn't mind trying it out.

[superfreddy]

Amazon got a piece of the action with their "Amazon Local".

[kookbreaker]

Groupon reminded me of that company back in Web 1.0 that dealt in coupons. I don't remember the name. The idea was based on purchased coupons and deals which depend on customers forgetting about said coupons and the advertisers and merchants cashing in on that. This company was so much about the coupons that they attracted the crowd that never forgets, and so their cash-in rate was almost 100%. That meant zero dollars left over.

Can't recall that company's name, however.

[Puppycow]

Originally Posted by kookbreaker

Groupon reminded me of that company back in Web 1.0 that dealt in coupons. I don't remember the name. The idea was based on purchased coupons and deals which depend on customers forgetting about said coupons and the advertisers and merchants cashing in on that. This company was so much about the coupons that they attracted the crowd that never forgets, and so their cash-in rate was almost 100%. That meant zero dollars left over.

Can't recall that company's name, however.

I once bought a deal like that. A book of coupons for a restaurant near my house. Seemed like a reasonable deal when I bought it but I didn't end up using all of them and if I had to do it again I would pass up that deal.

[Ziggurat]

Originally Posted by stilicho

That's the biggest issue and not so much the business model. Hand in hand it makes for a horrible investment decision.

Now let's go back and look at Facebook too. We haven't seen anything about accounting fraud yet but their claim to having a billion unique users is certainly close. I think they'd have trouble proving they have a tenth that number and the onus is upon them.

The problem isn't the number of users they have. The problem is what that means. My brother has a facebook account, but he never uses it. Facebook can't make any money off of him, but he's still a unique user. I do use facebook, but I never click on the ads, I don't play any of their games, and I don't use it to "like" stuff. I can't be making them much money either.

[theprestige]

Originally Posted by kevsta

Dotcom v2.0 has 3 engines on fire and is losing altitude fast..

Not really. Groupon isn't a very good example of Dotcom v2.0. Try Amazon, or Intuit, or Apple. There's plenty of companies who survived the trial by fire of the dot-com bust in 2001, and are now doing just fine for themselves in the enterprise e-commerce market.

... Not that Groupon is really enterprise e-commerce. There's a difference between a failing business model that happens to use the Internet in some tangential way, and a successful business model that is based on using the Internet as its platform.

[DrDave]

Originally Posted by BenBurch

Mechants I have talked to hate Groupon. They lost a lot of money on trying to use it for promotions. The "customers" you get in rarely return. So, really you only get any particular merchant ONCE and they won't come back to Groupon. There is a sucker born every minute, but word gets around.

The customers don't go back because they are really customers of Groupon - the business they get the service from is pretty inconsequential to them. They will just keep looking at the deals on Groupon so will probably only go back if the same offer comes up in future (and like you I understand that few business are willing to do that)

[kookbreaker]

The more I think about it, the more I am glad these folks are crashing and burning. I really got fed up with not only their hard-sell tactics but the fact that they seemed to have every hack e-commerce 'expert' at their beck and call.

[Mark6]

Originally Posted by Puppycow

I once bought a deal like that. A book of coupons for a restaurant near my house. Seemed like a reasonable deal when I bought it but I didn't end up using all of them and if I had to do it again I would pass up that deal.

Looks like you were exactly the customer they were looking for. Had you used up all the coupons, restaurant (presumably) would have lost money.

[Psi Baba]

I think that most people tend to use Groupon to save money at establishments that they already patronize anyway, especially when it comes to restaurants. Sure, you might use it to try a new place, but when a familiar name comes up in your Groupon mailing, you'd be crazy not to jump on it.

One thing that merchants hate the most is customers who try to spend only up to the amount of the voucher, and even worse, tip on the net amount they paid rather than the amount before the discount is calculated. So not only did you save money, but you're going to short the waitstaff? Not cool. Any time I've used a Groupon in a restaurant, I've spent way over the voucher amount (I go out to eat to have a good time--if I'm watching pennies I stay home), and I always tip on the pre-coupon amount and then some. And yet I still feel sheepish using the things--I feel like I can hear the grumblings in the back when I hand over the coupon. The thing I don't like about these things is that, even though you have a year to redeem it, I always feel pressured to use it because I already paid for it.

[timhau]

Groupon now down about 40 % from Monday's opening level (and I still wouldn't touch it with a 10-foot pole).

[MattusMaximus]

Yowch. I have a friend who works at Groupon... but for how much longer?

[jargon buster]

Girlfriend bought a voucher for laser eye surgery (£1200), when she went for the consultation they told her she only needed one eye doing which would have cost around £700 without the voucher), she went for a second opinion at another store and they correctly told her she need both doing.

Totally unethical

[jimtron]

Quote:

But as Agrawal described it, Groupon was riding high because its most important constituency—the small businesses who slashed their prices to entice Groupon’s customers—was getting ripped off. When Groupon runs a deal with a local business, it demands very unfavorable terms.

I get why it's a bad deal for merchants, but I don't exactly get the "ripped off" part. If Groupon is not honest and upfront with their terms, then it's a ripoff. But I assume the terms are made clear, so is there really pressure (like a loan shark, from OP quote) for merchants to sign up (other than a pushy salesperson--but that's not unique to Groupon)?

Also, I haven't been following their deals lately, but when I was, I would see some of the same businesses show up again and again; so presumably they wouldn't keep working with Groupon if it wasn't helping.

Just to be clear, I'm not saying Groupon is a good deal for merchants, just that I don't think Groupon is necessarily ripping anyone off. Also, effective advertising is usually quite expensive.

[Aepervius]

Originally Posted by jimtron

I get why it's a bad deal for merchants, but I don't exactly get the "ripped off" part. If Groupon is not honest and upfront with their terms, then it's a ripoff. But I assume the terms are made clear, so is there really pressure (like a loan shark, from OP quote) for merchants to sign up (other than a pushy salesperson--but that's not unique to Groupon)?

Also, I haven't been following their deals lately, but when I was, I would see some of the same businesses show up again and again; so presumably they wouldn't keep working with Groupon if it wasn't helping.

Just to be clear, I'm not saying Groupon is a good deal for merchants, just that I don't think Groupon is necessarily ripping anyone off. Also, effective advertising is usually quite expensive.

My understanding from a few horror story on internet, is that the devil is in the details. Like having no limit on the number of people you have to serve, so folk at bakery being forced to give all their muffing for next to nothing due to a huge amount of non returning customer coming with coupon. But if you scratch the paint long enough you find out that OK maybe groupon wasn't offering a good deal and had nasty small print making the deal worst, but the small folk signing up on it did not read the small print either.

I tend to place the blame on both groupon and the people signing up deals with them 50/50.

[Gord_in_Toronto]

Originally Posted by Eddie Dane

I never understood the merchants using Groupon.

To me, it seemed glaringly obvious that the Groupon deal would lose you money and the customers would just move on to the next Groupon deal and never return.

The trick to making Groupon work is to sell a "product" that has no real intrinsic value.

If you run an astrology website, first double your advertised on-line price. If you were smart, you would have set this price when you started. Advertise 30-minute readings for a $120 but offer every one who calls a "special" deal -- half price this week for whatever idiotic reason you make up; the Sun In Aries Special, for example.

Then your Groupon Deal is half your regular, advertised price. You get $30 for spending 30 minutes on the phone spouting nonsense from a prepared script.

Every penny you collect is free money, assuming you are not already working at the scam for 24 hours a day. If you are any "good" at this you may even get a few new customers at $120 (or $60 if the Sun is still in Aries).

DO NOT SELL ANYTHING YOU HAVE TO PAY FOR unless you are making a profit even with the Groupon deal.

Disclaimer: Although I am a Certified Management Consultant, this should not be considered professional advice.

[Aepervius]

If you rise your price, and offer a special offer that would be considered illegal here around. Consumer protection to avoid precisely the kind of fraud where the merchant the day/week before a special offer/special sales rise the price to make it appear as if it was an opportunity.

[timhau]

Would it be illegal if a coupon were involved? We also have made it illegal to advertise "Now 50% off, only 50€!" if the merchandise was never for sale for 100€, but what if it was for sale for 100€ right now and you only got it for 50 with the coupon? (I have no idea of how that would work here.)

[Aepervius]

Originally Posted by timhau

Would it be illegal if a coupon were involved? We also have made it illegal to advertise "Now 50% off, only 50€!" if the merchandise was never for sale for 100€, but what if it was for sale for 100€ right now and you only got it for 50 with the coupon? (I have no idea of how that would work here.)

Good question. I think coupon fall under "promotional offer" but IANAL so...

[theprestige]

The obvious and ethical solution is to set the price as high as the market will bear, and set the discount below that price but above cost.

[Eddie Dane]

I also get the feeling that many merchants using Groupon just bought a huge quantity of stuff from a bankruptcy auction.

One of the success stories the salesman mentioned, was a guy selling one-size-fits-all sports bra's from Nike.

I'd even question if the were really made by Nike.

that just sound like 'I just got three pallets full of sports bra's, cost me € 2 per pair, RRP is € 45, sell 'm for € 25 via Groupon.

[Puppycow]

Thought an update would be interesting. Groupon's share price was $6.15 when I started this thread. The latest is $5.52, but that's actually up from as low as $2.63 in November.

Groupon Inc (GRPN) Shares Price Double From Low Hit In November 2012

Quote:

The company has witnessed tsunami type tides in its share prices, the 53 week high of $25.84 and a 52 week low of $2.63. The daily deal business forerunner lost 90 percent of its market capitalization as the growth projections of the company slowed down, and company directed its focus towards new products and profitability.

The company’s total valuation has two important point of reference to be measured against: its opening market value at the date of its public offering, and the rejected Google Inc (NASDAQ:GOOG) offering, which totaled more than $5 billion, including an earn-out. On both fronts, Groupon Inc (NASDAQ:GRPN) has turned out to be a big loser, losing billions in investor capital at the time of its decline.

[fuelair]

Originally Posted by Corsair 115

Er, wasn't that lesson amply demonstrated about twelve or so years ago?

New generation of suckers born all the time......................

[The Central Scrutinizer]

Originally Posted by Puppycow

If you thought Facebook's IPO was a bust, consider the poor fools who invested in the Groupon IPO:

Groupon Now Down 78% From Its November IPO Price



Now some people are dancing on its grave:
Ding Dong, Daily Deals Are Dead



I guess the lesson here is to beware of trendy new companies unless you really know what you are doing. A few have worked out pretty well, like Google:



I remember that Google did once make an offer to buy Groupon before their IPO. I guess they dodged a bullet on that one considering subsequent developments.

They should have taken the $7 billion(?) Google(?) offered them.

This was quite predictable. It was obvious from the start they didn't have a competitive moat, among other problems.

[kookbreaker]

I really would like Groupon to die already. Thankfully nobody seems to bring them up as a marketing method anymore. So my desire to see them die is pure vengeance.

[theprestige]

Originally Posted by kookbreaker

I really would like Groupon to die already. Thankfully nobody seems to bring them up as a marketing method anymore. So my desire to see them die is pure vengeance.

Why? Did Groupon kick your dog or something?

[Eddie Dane]

Originally Posted by theprestige

Why? Did Groupon kick your dog or something?

If Recall correctly, Kookbreaker is a small retailer.

Groupon has been selling small retailers the story thy they could do effective marketing via Groupon.

Tuns out that this is a really bad deal. More so for restaurants.

[theprestige]

Originally Posted by Eddie Dane

If Recall correctly, Kookbreaker is a small retailer.

Groupon has been selling small retailers the story thy they could do effective marketing via Groupon.

Tuns out that this is a really bad deal. More so for restaurants.

Could be, could be.

I know my wife's gym gets a lot of business through Groupon, and is a very satisified repeat customer of the service.

I also know of several restaurants around town that seem to be satisfied enough to use Groupon repeatedly. I haven't examined their books, but they don't seem to be going bankrupt.

I dunno about small retailers, but it seems like you really can do effective marketing via Groupon.

[kookbreaker]

I am a small retailer. Note my .sig.

For the better part of a year I had Groupon, Groupon agents and a host of Groupon imitators were pounding and pressuring me (and pretty much every other business) with their 'great plan'. All I needed to do was sell a product at a loss, let Groupon win either way and I would just be glad to have people in the door, right?

Bad enough, but I swear that Groupon must have bribed every marketing blogger on the net because they couldn't say enough about Groupon. Groupon! Groupon! Groupon! If you aren't using Groupon YOU MUST BE DOING SOMETHING WRONG!

Thankfully I resisted the pressure, but not after wondering if I was being the guy buying stock in Buggy Whips, Inc. So yes, I am glad that the chickens came home to roost and Groupon is suffering after their grossly inflated status.

They might work for some businesses - gyms are a ripe market since they all pretty much depend on people not showing up anyway. Restaraunts might be able to work with them, but a lot cannot. I don't know enough about their industry but you would need to give the deal on something high margin.

Groupon pressured us to but their crap for ages. Turns out the Emperor has no clothes.

[The Central Scrutinizer]

Originally Posted by kookbreaker

They might work for some businesses - gyms are a ripe market since they all pretty much depend on people not showing up anyway. Restaraunts might be able to work with them, but a lot cannot. I don't know enough about their industry but you would need to give the deal on something high margin.

I suspect restaurants have a far higher markup than most retailers. So even at 50% off, they're still selling above cost.