That Living Social or Groupon voucher is great for the customer, but it can be a near-death knell for the business on the other side of the transaction. (What are LivingSocial and Groupon? Groupon and Living Social are online services through which businesses offer deep-discount deals to Groupon’s and Living Social’s users. The customer purchases the deal up front – say $5 for a $10 cake – and then they take the coupon Groupon or LivingSocial sends them to the bakery to redeem it.) Customers who use Living Social and Groupon like the great discounts – but merchants tell another story.
We’ve previously mentioned Posie Cafe and their problems as a Groupon deal provider. In fact, their Groupon offering nearly put the Portland, Oregon coffee shop out of business.
“There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign,” explained Posie Cafe’s owner.
Mission Mini’s cupcake bakeshop, in San Francisco, tells a similar story. After offering a 50% discount on a dozen mini cupcakes, the shop was so swamped with orders (3000 the first day) that three employees threatened to quit.
Allie Ham, owner of Creative Hands massage therapy in Washington, D.C. was so overwhelmed, and lost so much money through her LivingSocial and Groupon deals that, she said in an NPR interview, “I woke up crying. Many, many, many mornings, I woke up crying.”
In addition to being unable to keep up with the demand, many, if not most, LivingSocial and Groupon deals are a money-losing proposition – for the merchant, that is – Groupon and LivingSocial make out like bandits.
Here’s how it works with Groupon: Groupon keeps half of whatever the Groupon users pay for the deal. So if the deal costs the customer $12, Groupon keeps $6, and the business gets $6. But don’t forget that the business is offering a deal – usually at least 50% off. So if the customer is paying $12, then it’s going to be for something for which the business would usually charge $24. So the business is selling a $24 item but only getting $6.
Remember that old joke about “We’re selling at a loss!” “Yes, but what we lose on the price we make up in volume!” ?
Well, that’s the model that Groupon is selling to the businesses who offer deals for them.
But wait, there’s more: If the customer pays less than $10 for the Groupon deal, Groupon keeps all of the money – they don’t even split it with the business. So if the customer pays $9 for a Groupon deal which is 50% off (i.e. an $18 value), the business is giving the customer something for which they ordinarily charge $18 – the customer only paid $9 for it – and the business gets nothing. Groupon keeps all $9.
Now Groupon has brought that model over to the other side of the pond, with similar results for some businesses.
For example, the Need a Cake bakery, in Reading, in England, recently ran a Groupon deal, offering a dozen cupcakes – a £26 (about $40.00) value – for just £6.50 (about $10.00).
Need a Cake found themselves deluged with 8,500 orders. Between the loss on each order, and the added expense of fulfilling them (hiring extra staff, etc.) it completely wiped out Need a Cake’s profits for the year.
Need a Cake’s owner, Rachel Brown, said that it was “without doubt, the worst ever business decision I have made,” adding that “It’s been an absolute nightmare.”
Now, to be sure, there are some businesses who have had great success with Groupon. And clearly some types of businesses will do better than others when offering deep discounts. The majority of businesses that have problems with their Groupon offerings seem to be food-based businesses.
The big question is, why isn’t Groupon doing a better job of adequately advising their advertisers as to what to expect or, even, warning them off if they are likely to have a negative result from offering a Groupon discount?
One reason may be that they had until the beginning of this month been ramping up for an IPO, and so wanted to take in whatever profits they could, damn the torpedos (to their customers), full speed ahead. That IPO happened just 3 weeks ago, and their stock price has already plummeted with, ironically, some news outlets, such as ABC, noting that “Some merchants have said they have lost money through deal sites like Groupon … Merchants have complained that the new customers from Groupon can disrupt their business and aren’t very loyal.”
So, if you use Groupon, the next time you show up at a business with your Groupon voucher in your hot little hands, remember that what is a deal to you may be poison that merchant – and spend a little more, especially if you want to be able to shop there in the future.