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The business model was bad, and the sales tactics were bad, and the handling of the contracts was unethical at best. The salespeople pushed us to give a big dis

The business model was bad, and the sales tactics were bad, and the handling of the contracts was unethical at best. The salespeople pushed us to give a big discounts on the list price of our service, saying that the promotion would bring long-term business. But that never happened due to the one-off nature of the advertising. Instead, we made a loss on every customer due to the discount, while Groupon made their commission (25% of the list price if I recall correctly) whatever happened. Making excessive money while your clients lose money is not a viable business model. So we dropped them, as many others did, and they moved on until they finally ran out of victims. If I recall correctly, the second time we tried, they changed the contract percentages on us without informing us, similar to the story another business owner tells in a comment on the Medium post: http://bit.ly/1SRjksX http://bit.ly/1SRjksX

pbreit 11y ago
You do understand that with traditional advertising you spend money with no guarantee at all that it turns into sales? I don't understand why people are so down on advertising that guarantees foot traffic when most/all other advertising is a total crap-shoot.
- JohnTHaller 11y ago
  Groupon used to over promise the results you'd get. The business generally loses a chunk of money (and time away from profitable customers) on each Groupon user with the hope that they'll turn into a repeat customer. Unfortunately, most Groupon customers only go to these businesses to get a good deal. I have a couple different friends in NYC with businesses that tried Groupon and will never do it again now. The customers were far more demanding, quicker to complain, more likely to demand additonal free or discounted services, and more likely to threaten bad reviews to try to get their way. Groupon likely works for very specific businesses that cater to customers concerned with price above most other concerns who are willing to run regular sales and discounts to keep those customers a la department stores. And I say the above as someone that has bought physical products through Groupon a couple times.
- Throwaway23412 11y ago
  I imagine it has to do with the type of customers the advertising attracts. The type of customers a Groupon attracts would generally be short-term, coupon-chasing customers. I personally have around a dozen gift cards in my desk for restaurants I wouldn't normally go to but will eventually go to for the sake of spending the gift cards. Many entrepreneurs, from the owner of a market stall in India to the owner of a bootstrapped startup in Silicon Valley, will tell you that the frugal, hard-haggling, discount-chasing customer is the worst customer to have.
  - unclebucknasty 11y ago
    That and the fact that those customers were Groupon's customers, not the businesses'. Their loyalty was to Groupon and the never-ending stream of discounts they provided. OTOH, the businesses that offered the discounts were essentially commodities in the scheme. They created the value via their discounts that Groupon then sold to customers. Few cared about the businesses, as people were not buying the underlying service or product from those businesses. Instead, the product was the discount itself, which they were buying from Groupon.
    - sparkzilla 11y ago
      Perfectly described. Thank you.
  - X-Istence 11y ago
    In my experience those customers also expect and demand the world for the discounted price, whereas those that pay full price are generally less demanding. Not sure why that is...
    - jeffdavis 11y ago
      Purchasing luxury goods and services is generally about personal relationships, atmosphere, and other context. If you pay too little (not just get a discount or other small favor, but actually pay too little) then you are compromising your own experience and actually getting less value than the people paying full price. So it's no surprise that such people are ultimately less satisfied. The primary benefit they are getting out of it is the chance to tell their friends how low of a price they got.
- sparkzilla 11y ago
  Before I opened my retail business I founded a free magazine that built up over 14 years to $4 million in annual sales, so I have a reasonable idea of how advertising works. We succeeded because our interests were aligned with our advertisers. We worked with clients over the long term to make their ads work, and we only made a small percentage profit. Groupon didn't care if we made money, they wanted our deal so they could make money. As for foot traffic, perhaps Groupon might work in large cities, but for us, in a smaller city, the foot traffic was very poor. That said, I am interested to find success stories, if you have one.
- valgaze 11y ago
  So imagine it's the Groupon heyday (2010-2012) & also imagine you own a restaurant-- you want customers and get call from a rep. For reference, your food costs are 30%+/- Groupon rep comes in and sweet talks you or your manager into running a 50% discount but frames it as one or those $20 for $40 arrangements so it doesn't hurt so much for you to sign the contract. Now Groupon isn't going to go to all the effort here without getting a taste themselves, right? They take 50% of your 50% so you'll get about a quarter. That's not exactly great economics to always take a loss when food costs are 30%. But fine. All advertising costs money. And this Groupon thing definitely drives foot traffic, right? That's genuinely impressive and it WORKS...the problem is that it's the wrong kind of foot traffic. Problem 1: Bargain-hunters. These are the coupon-cutters and very "high-maintenance/low-margin" type of customers. You don't want a lot of them, if any. You'll only see them again if you offer the same or "better" deal. Groupon will drive them to you by the busload b/c they're living on Groupon and it also makes it incredibly easy for them to just kind of coast from Groupon to Groupon. Groupon subverts the whole idea of a coupon-- coupons are supposed to be price discrimination. People with $$$ (in theory) don't bother with coupons because it's not worth their time. Groupon isn't a coupons. Coupons are supposed to be annoying/hard to use by design. No intention to paint with a broad bush, but most of the time these "bargain-hunter" people will look to spend EXACTLY $20 and not a penny more. They want to feel like they're getting their "deal." They also tend to complain the most, are the most demanding, and also for extra credit they're not good tippers. So your poor, overwhelmed/overworked staff dealing with a tsunami of new customers crowding the shop have now got to service customers who are never coming back and your staff won't get tipped out a lot if at all. Ouch! Problem 2: Cannibalism. Imagine you have a great restaurant concept. You manage to survive w/ razor-thin margins, cut-throat competition, the great peanut/truffle shortage or whatever latest crisis. You also have a bunch of real "fans" who like your stuff and you might even call them regulars. They know about Groupon now too. So your regulars get on Groupon and instead of paying full freight they now are coming in for a discount. It's generally not a good thing when existing customers pay less without buying more-- thanks for the advertising Groupon! These people already like you and they now are paying less or worst case they become bargain-hunters themselves and stop coming altogether. Bottom line: Almost fundamentally the thing didn't make sense. It had a "holy cow!" effect on restauranteurs because it absolutely did drive foot traffic (Groupon I think was the fastest-growing firm IN HUMAN HISTORY-- google it.) For diners, it seemed like the perfect crime: You can go out to eat but pay half and still get a full meal. The story/hypothesis was if you can get people in the door w/ a discount that they'll be so enamored with whatever you're making that they can't resist and will come back later. Other concepts figured maybe get them in the door and try to upsell them on extras. Let's be VERY optimistic and say that phenomena was real and people looking for a discount came back to the restaurant. That is a handful of new customers. You still have the fundamental economic shakiness of the concept, the bargain-hunter/cannibalization issue, and the operational stress for decidedly "not-that-great" of a payoff. It's a really impressive concept but probably not a great idea for most businesses. Perhaps it's a fit for multiple teeth whitening sessions or a service (manicures or something?) but for anything else it was a loser bet.
- rdancer 11y ago
  Advertising leads to increased profit, on average. Groupon did not. Their whole proposition was bogus, and they knew it from the beginning. Their business model required a constant supply of small business owners who'd make the wrong decision. It was despicable. The difference is that Groupon never acted in good faith.

pbreit 11y ago

You do understand that with traditional advertising you spend money with no guarantee at all that it turns into sales? I don't understand why people are so down on advertising that guarantees foot traffic when most/all other advertising is a total crap-shoot.

JohnTHaller 11y ago
Groupon used to over promise the results you'd get. The business generally loses a chunk of money (and time away from profitable customers) on each Groupon user with the hope that they'll turn into a repeat customer. Unfortunately, most Groupon customers only go to these businesses to get a good deal. I have a couple different friends in NYC with businesses that tried Groupon and will never do it again now. The customers were far more demanding, quicker to complain, more likely to demand additonal free or discounted services, and more likely to threaten bad reviews to try to get their way. Groupon likely works for very specific businesses that cater to customers concerned with price above most other concerns who are willing to run regular sales and discounts to keep those customers a la department stores. And I say the above as someone that has bought physical products through Groupon a couple times.
Throwaway23412 11y ago
I imagine it has to do with the type of customers the advertising attracts. The type of customers a Groupon attracts would generally be short-term, coupon-chasing customers. I personally have around a dozen gift cards in my desk for restaurants I wouldn't normally go to but will eventually go to for the sake of spending the gift cards. Many entrepreneurs, from the owner of a market stall in India to the owner of a bootstrapped startup in Silicon Valley, will tell you that the frugal, hard-haggling, discount-chasing customer is the worst customer to have.
- unclebucknasty 11y ago
  That and the fact that those customers were Groupon's customers, not the businesses'. Their loyalty was to Groupon and the never-ending stream of discounts they provided. OTOH, the businesses that offered the discounts were essentially commodities in the scheme. They created the value via their discounts that Groupon then sold to customers. Few cared about the businesses, as people were not buying the underlying service or product from those businesses. Instead, the product was the discount itself, which they were buying from Groupon.
  - sparkzilla 11y ago
    Perfectly described. Thank you.
- X-Istence 11y ago
  In my experience those customers also expect and demand the world for the discounted price, whereas those that pay full price are generally less demanding. Not sure why that is...
  - jeffdavis 11y ago
    Purchasing luxury goods and services is generally about personal relationships, atmosphere, and other context. If you pay too little (not just get a discount or other small favor, but actually pay too little) then you are compromising your own experience and actually getting less value than the people paying full price. So it's no surprise that such people are ultimately less satisfied. The primary benefit they are getting out of it is the chance to tell their friends how low of a price they got.
sparkzilla 11y ago
Before I opened my retail business I founded a free magazine that built up over 14 years to $4 million in annual sales, so I have a reasonable idea of how advertising works. We succeeded because our interests were aligned with our advertisers. We worked with clients over the long term to make their ads work, and we only made a small percentage profit. Groupon didn't care if we made money, they wanted our deal so they could make money. As for foot traffic, perhaps Groupon might work in large cities, but for us, in a smaller city, the foot traffic was very poor. That said, I am interested to find success stories, if you have one.
valgaze 11y ago
So imagine it's the Groupon heyday (2010-2012) & also imagine you own a restaurant-- you want customers and get call from a rep. For reference, your food costs are 30%+/- Groupon rep comes in and sweet talks you or your manager into running a 50% discount but frames it as one or those $20 for $40 arrangements so it doesn't hurt so much for you to sign the contract. Now Groupon isn't going to go to all the effort here without getting a taste themselves, right? They take 50% of your 50% so you'll get about a quarter. That's not exactly great economics to always take a loss when food costs are 30%. But fine. All advertising costs money. And this Groupon thing definitely drives foot traffic, right? That's genuinely impressive and it WORKS...the problem is that it's the wrong kind of foot traffic. Problem 1: Bargain-hunters. These are the coupon-cutters and very "high-maintenance/low-margin" type of customers. You don't want a lot of them, if any. You'll only see them again if you offer the same or "better" deal. Groupon will drive them to you by the busload b/c they're living on Groupon and it also makes it incredibly easy for them to just kind of coast from Groupon to Groupon. Groupon subverts the whole idea of a coupon-- coupons are supposed to be price discrimination. People with $$$ (in theory) don't bother with coupons because it's not worth their time. Groupon isn't a coupons. Coupons are supposed to be annoying/hard to use by design. No intention to paint with a broad bush, but most of the time these "bargain-hunter" people will look to spend EXACTLY $20 and not a penny more. They want to feel like they're getting their "deal." They also tend to complain the most, are the most demanding, and also for extra credit they're not good tippers. So your poor, overwhelmed/overworked staff dealing with a tsunami of new customers crowding the shop have now got to service customers who are never coming back and your staff won't get tipped out a lot if at all. Ouch! Problem 2: Cannibalism. Imagine you have a great restaurant concept. You manage to survive w/ razor-thin margins, cut-throat competition, the great peanut/truffle shortage or whatever latest crisis. You also have a bunch of real "fans" who like your stuff and you might even call them regulars. They know about Groupon now too. So your regulars get on Groupon and instead of paying full freight they now are coming in for a discount. It's generally not a good thing when existing customers pay less without buying more-- thanks for the advertising Groupon! These people already like you and they now are paying less or worst case they become bargain-hunters themselves and stop coming altogether. Bottom line: Almost fundamentally the thing didn't make sense. It had a "holy cow!" effect on restauranteurs because it absolutely did drive foot traffic (Groupon I think was the fastest-growing firm IN HUMAN HISTORY-- google it.) For diners, it seemed like the perfect crime: You can go out to eat but pay half and still get a full meal. The story/hypothesis was if you can get people in the door w/ a discount that they'll be so enamored with whatever you're making that they can't resist and will come back later. Other concepts figured maybe get them in the door and try to upsell them on extras. Let's be VERY optimistic and say that phenomena was real and people looking for a discount came back to the restaurant. That is a handful of new customers. You still have the fundamental economic shakiness of the concept, the bargain-hunter/cannibalization issue, and the operational stress for decidedly "not-that-great" of a payoff. It's a really impressive concept but probably not a great idea for most businesses. Perhaps it's a fit for multiple teeth whitening sessions or a service (manicures or something?) but for anything else it was a loser bet.
rdancer 11y ago
Advertising leads to increased profit, on average. Groupon did not. Their whole proposition was bogus, and they knew it from the beginning. Their business model required a constant supply of small business owners who'd make the wrong decision. It was despicable. The difference is that Groupon never acted in good faith.