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Why Groupon Is Poised For Collapse

392 points by charlief 15y ago

JacobAldridge 15y ago
I don't know if it convinces me that Groupon is "poised for collapse", but it certainly exposes several risks in the business model (for Groupon, the merchant, and the consumer), as well as how competitors can take advantage of those.
- Spyplane 15y ago
  When you look at the $1bil they made last year in funding, and what amount they listed in their IPO paperwork, they certainly look and feel like a ponzi scheme. I hope they are not, but it feels that way. I'm staying as far away from that stock as possible.
  - encoderer 15y ago
    This is true only if you make up a new definition of "ponzi scheme." I disputed this same point last week: http://news.ycombinator.com/item?id=2617760 http://news.ycombinator.com/item?id=2617760
- jerf 15y ago
  I went in with my metaphorical trigger finger on the "flag" button, but it does seem to add a new and useful perspective that I haven't seen yet. Explaining Groupon as a network of loans makes a lot of sense. In fact, as someone who has resisted the characterization of Groupon as a "Ponzi scheme" on the grounds that I prefer the term actually mean something specific, this has gone a ways to explaining how that may actually be true. But the interesting scheme isn't so much in the investors, where people have been talking about it, but in the way that businesses are being paid with revenues from the subsequent Groupons, and so on. There's a lot of loan risk in a lot of directions on Groupon's balance sheet. It seems to me they don't have to be off by much for it to crumble. "Collapse" in the title is not just a linkbait word, the author really outlines how the whole thing might very quickly collapse.
- arturadib 15y ago
  Agreed. It's a very insightful article on the pluses and minuses of their business model.
wccrawford 15y ago
Oh look, another 'Groupon isn't magic' post. Yes, you have to actually work to maintain those new customers, just like always. In fact, you'll probably have to work a little harder than normal, since their first experience at your business is at a huge discount. But treat them right and let them know what they're in for and it's no different than other other coupon scheme designed to lure customers in. Oh, except for being a huge buzzword right now and attracting more customers than would normally be possible. Yes, you heard that right, I'm saying that Groupon can be a really good thing for your business if you jump on now. But ONLY if you have properly prepared for it, and negotiated with Groupon correctly. Don't let them badger you into a bad deal for your business. You would be better with no deal than a bad deal.
- saddino 15y ago
  The problem is that there is no guarantee any of those customers are actually new. It appears that in many cases, most are ALREADY your customers and you're simply giving them discounts.
  - wccrawford 15y ago
    That's almost always the case with coupons, though. Sure, you can exclude current customers under some coupon schemes, but you risk alienating them... And losing an existing customer is costly, since you put so much into gaining them in the first place.
    - brk 15y ago
      Right, but a "$2 off your next $20 order" coupon is much much different than a "$19 off your next $20 order" Groupon.
      - wccrawford 15y ago
        If you don't like the terms, don't sign up for it. As I said, Groupon isn't magic. Making a bad deal with them will not magically turn into a good deal. You have to use Groupon as a tool, not a genie.
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qeorge 15y ago
It seems his main point is this: Google Offers pays merchants faster (80% of the money goes to the merchant right away, vs 33% with Groupon). The OP expects this will force Groupon to make the same deal with merchants, which will change their business model, which will put them out of business. That or Groupon won't change its business model, and Google Offers will run them out of business by virtue of this better deal. IMHO, going from that small point to "Groupon is poised for collapse" is just a bit hyperbolic.
- deleted 15y ago
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- commandar 15y ago
  The thing is, Groupon is already burning cash like it's going out of style with their current model, which is hugely lopsided in Groupon's favor compared to the merchant. If Google starts pushing things toward a position that's a bit more equitable for the merchant, it could end up being a huge problem for Groupon. The number of articles that have been published talking about how poorly Groupon works out for many merchants means there's a lot of room for somebody to step in with more favorable reimbursement and revenue-split terms. Groupon either has to match those or watch their userbase jump to the competition.
- jacques_chester 15y ago
  No small business worth its salt is going to turn down favourable terms like 80% in 4 days. Cash flow is life or death on a weekly basis for small businesses.
cletus 15y ago
This is one of the best and most damning analyses of Groupon I've seen yet, which is kinda surprising coming from TC but I guess it is a guest post. The biggest parts of this are the account risk, the needing to grow revenue to pay existing liabilities (which is and should be a huge warning flag for any enterprise) and just how much room there is for someone to do this better. My only fear is that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley.
- ChuckFrank 15y ago
  Based upon the mounting evidence about the condition of Groupon, cletus' fear "that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley." makes absolutely no sense. Suggesting that a poorly performing companies weak IPO, or otherwise, will taint other IPOs and prompt regulations makes no sense whatsoever. For the health and vigor of the tech markets, Groupon's IPO should be a spectacular failure based upon the poor business model and weaker financial position.
  - cletus 15y ago
    Imagine a worst case scenario where Groupon files for Chapter 11 and defaults on all outstanding debts to merchants, which by that stage could amount to over a billion dollars (IIRC it's currently $280 million). Imagine that because of that lost revenue many small businesses end up collapsing. At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money. Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".
    - SwellJoe 15y ago
      I think the more dangerous result will be that the scheme continues to "work" for another couple of years, a half dozen competitors come along and run the same basic scheme (with tweaks to make the new businesses "unique"; maybe they go for particular niches currently unserved or whatever), those companies also have explosive IPOs, and then the whole thing comes crashing down in a couple more years when the IPO money runs out. One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved. It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.
kul 15y ago
Very interested to see how this plays out, because there's a faltering consensus around Groupon, and it's getting closer to their IPO. See: http://www.guardian.co.uk/business/2011/jun/10/only-fool-invest-groupon-analyst http://www.guardian.co.uk/business/2011/jun/10/only-fool-inv... It reminds me a little of when there were a few dissenting voices claiming the US housing market was due a correction and yet prices kept going up.
- rwmj 15y ago
  Good to see at least one article about this in the mainstream media. Have there been any others?
mcdowall 15y ago
Having dealt with the local advertising model myself (restaurant virtual tours) I can testify how god damn hard it is to get money out of small business owners so the success of Groupon is a surprise to me. From a consumer perspective I unsubscribed a few months ago as I really didnt want to hear about a Botox or Massage deal each and every morning. It was good for xmas presents I will admit but in my local area the variety of the offers was somewhat limited (and Its by no means a small town), I shouldnt imagine I will check the site until around mid December again.
- raganwald 15y ago
  I can testify how god damn hard it is to get money out of small business owners so the success of Groupon is a surprise to me. Well, now we know how to get $62,500 out of a small business: Offer them $7,000 within about 5 days. This is the salient point of the article: Groupon is more than just a marketing vehicle, it has a financing angle to it that should be evaluated in terms of risk.
  - larrys 15y ago
    True and there is also (and I can't think of the name) a psychological principle for this which is how someone will pay money to insure against an event with a negative outcome but not to wager on something. Umm. I think it might be called "Prospect Theory" or some variation like that.
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arturadib 15y ago
Insightful article, but notice that the business model being criticized is in many ways well known (and successful): namely, that of book publishers. When an author deals with a book publisher, he/she gives up some of their future revenues in exchange for cash in advance and publicity. Likewise, when a local business deals with Groupon, they are giving up part of their revenue in exchange for upfront cash and publicity. The main difference might be in the actual numbers (cash upfront, revenue share %, etc). The risks pointed out remain, and are very real though.
- larrys 15y ago
  Authors don't really have ongoing costs once they get the money though like a restaurant as one example would. Publishers also handle promotion and distribution as well. You can self publish of course but then you don't normally get the same legitimacy, distribution, and other intangible benefits.
- tomp 15y ago
  Except for the upfront payment, which is obviously a sunk cost, book publishers have no other liability. Unlike Groupon, which might have to reimburse its customers if a client business goes under. Furthermore, AFAIK author deals are screened/filtered, a bad book will not get published (not that this is a 100% accurate process, see for example 4 Hour Work Week). Judging from the article, Groupon does little screening, so their risk is much greater.
  - commandar 15y ago
    >(not that this is a 100% accurate process, see for example 4 Hour Work Week). While I got a chuckle out of this, given the financial success of the book, it's a good book from the publisher's perspective.
    - tomp 15y ago
      Actually, that's exactly what I meant. I can't remeber where I read it, but Tim claimed that many publishers rejected him, before he found that one that wouldn't. Or am I thinking of the wrong title?
bostonvaulter2 15y ago
The part about how groupon will refund the price of the groupon if the business goes of out of business is interesting because Living Social specifically does not do that.
- larrys 15y ago
  If there are some nice public failures with people complaining I'm sure states will fix that with some legislation.
- ilkandi 15y ago
  I've been refunded a couple of times from other deal sites when the business went bankrupt. It's just good customer service to do so.
ig1 15y ago
All these attacks rest on the assumption that Groupon aren't going to change their business model at all. It's seems a near certainty that they're going to move into the dynamic yield management business which is likely to be highly profitable. For a lot of businesses their excess capacity is a lost cost anyway. They have to pay their staff regardless or not they do work. A customer might cost $X to service, but that completely ignores the fact that the company would have to pay $X even if that customer wasn't there. Sure Groupon might not be matching that spare inventory to it's deals with great precision at the moment, but it's only going to be a matter of time. Look for example at GrouponLive, their partnership with Livenation who are the largest entertainment ticketing company in the world. Does anyone seriously think Livenation are having wool pulled over their eyes ? - they know that yield management is important and Groupon are probably going to become the leaders in that space.
- powera 15y ago
  I'm sorry, but justifying a $15 Billion (with a B) valuation on a business that Groupon isn't even in yet is pointless. It smacks of Enron, to be honest.
  - ig1 15y ago
    What percentage of Amazon's income comes from Book sales ? A large amount of Amazon's valuation came from the fact that they'd be able to extend and become the dominant online retailer in a huge number of product categories.
    - ig1 15y ago
      Are people really down-voting a comment made in good faith purely because they disagree with it, or is there somethingly fundamentally wrong with my statement which I'm just completely missing ?
      - jbellis 15y ago
        I can't speak for others, but I downvoted because the time to figure out your business model is long before IPO. So a claim that an "attack" isn't valid because it ignores the possibility of radical business model changes isn't worth discussing.
dr_ 15y ago
Not sure if I entirely agree with this analysis. There's an element of inventory management which Groupon allows for, which has previously been unheard of for most small businesses. Maybe if you realize you are definitely getting x number of customers or x number of dollars), you can better manage your cash flow. Take the photo of the receipt provided in the article. A coke costs $2.00, and presumably it's a fountain drink, cause it mentions the refill is free. We've all been exposed to this, and let's face it, it's a blatant ripoff, but on some level its understandable - it's a way for the restaurant to make some additional cash, perhaps because the traffic is sporadic or perhaps to save up for a rainy day. But does coke really need to cost $2.00, if you have a better expectation of how much product you are definitely going to sell? My guess is, probably not.
ChuckFrank 15y ago
With mounting evidence of Groupon's weak financials and long term business sustainability, we should all advocate against investing in Groupon. The better our market segment wisdom, the better for all of us. If we let crap float to the top, then top performing companies will always have their market stigma to overcome. See biotech 2000-2005. Besides Mason has already told us that Groupon is a joke when he told Charlie Rose that Groupon is to tech what Nsync was to pop. High-flying, fast - crashing products poised for brief nostalgia, and obscurity. http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/ http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/ O ps. my favorite quote of this emerging IPO debacle has been thus far.. "Groupon's IPO prospectus should raise several red flags in a sensible investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving more red flags than a May Day parade." Now that's a great visual. http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/ http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsk...
uptown 15y ago
I think that Groupon is likely to adjust their vig if they start to see their momentum decline. Instead of 50%, they take 40% or 30% …. at which point they can circle-back and offer their services to all of the business that may have declined their services due to the steep percentage of the offer they demanded. Sure, this means less revenue coming out of each deal, but it seems to give them a quick way adapt.
ajays 15y ago
One thing that a lot of analyses fail to account for are the number of Groupons that go unused. I would love to see some figures on how many Groupons are never redeemed (for whatever reason). I had some friends visiting SF, and they had bought Groupons from various outfits for the trip. But they ended up not using a few of them, and gave them to me. Chances are I'll end up using them, but I wonder: how many such Groupons expire unused?
- ethank 15y ago
  I would love to see the breakage figures on Groupon. I haven't looked at the S1, but do they account for them in revenue?
- jrwoodruff 15y ago
  According to the article, it doesn't sound like they really keep track of redeemed vouchers. Because some merchants track redemptions on paper, Groupon has no way of knowing how many unredeemed Groupons are outstanding.
- ilkandi 15y ago
  It probably works out as high as regular gift cards. They're easier to find (just search your email) but they're easier to buy so one can get much more of them. I have friends who bought "pay $X for 10 workouts" but only end up going once before it expired.
- gojomo 15y ago
  They make a lot from vouchers that are never used. (The term of art for such revenues is 'breakage'.) For a stored-value medium that's like a gift card, many states prohibit an expiration-to-zero-value. Groupon has been sued a bunch of times over this; at least in those states, I think their current policy is that the business must still honor the Groupon for the original purchase price (but not the ~2X face value). This blog post by Andrew Mason suggested lawsuits were unnecessary because customers unhappy for any reason, including expiration policies, could always rely on 'the Groupon Promise' for a full refund: http://www.groupon.com/blog/cities/groupon-organizes-class-action-against-itself/ http://www.groupon.com/blog/cities/groupon-organizes-class-a... However, if you try to get a refund on an expired Groupon, they'll reject your request. So Mason's blog post and 'the Groupon Promise' are deceptive... and Groupon probably deserves to be sued over the gap between the unequivocalness of their 'promise' and the way they carve out exceptions in practice. They talk the talk of a 'customer is always right' retailer, but their model seems to require them to be stingy with refunds.
lichichen 15y ago
HN: just out of curiosity is there any examples of companies that have tanked based on speculation of failure regardless of track records? Ie: Speculation leads to lower investor confidence leading to pulling out of investments and so on so forth
- raganwald 15y ago
  When you say "regardless of track record," what is being discussed Ad Nauseum is whether Groupon has a track record of success or not. This is different than a company that has a consensus track record of success but is battling some unrelated speculation. It's almost the other way around: Groupon spends $1.43 to buy $1.00 of revenue, but boosters are speculating that they can pivot their model or harvest more revenue from their merchants and email list to make $1.44 revenue from every $1.43 they spend.
- aninteger 15y ago
  Sega and the repeated negative news on the Dreamcast. It was a great system, and ahead of it's time (compared to the PS1).
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justin_vanw 15y ago
It's almost absurd how closely Groupon is following the classic 'tech bubble' road to disaster. 1. Hype (check) 2. IPO talk (check) 3. Turn down acquisition at incredibly high P/E (check) 4. Superbowl Advert (check) 5. IPO just in time to avoid running out of money (on the way) 6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets 7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced 8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.
- encoderer 15y ago
  You left out "generate massive sums of actual revenue from real, paying customers, and become the fastest growing company by revenue in history." I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.
  - gaius 15y ago
    Groupon spends $1.43 for every $1 in revenue. Hell they could just not do any business and increase their revenue 43% overnight...
    - jaredsohn 15y ago
      No; that would increase their profit at the expense of revenue.
    - 3pt14159 15y ago
      Does that spending include their dividends or other cash outflows to the founders? Because if it is straight spending money they are in trouble.
      - imjustatechguy 15y ago
        It doesn't include the hundreds of millions which have been cashed out -- there numbers would look even worse if they included those numbers.
elb0w 15y ago
Anyone else getting tired of these? Why are these companies not being held responsible for their own negligence? If you do not do the math and cannot afford to lose the money then how dare you agree to the terms. This is not on Groupon or any other Daily Deal service. It solely relies on the Small Business owner that does not do his due diligence. This model is no different than bulk purchasing from a supplier. However, the supplier still makes money because they have figured out how much they can give to still turn a profit. Small business owners need to either look at how much they stand to lose or take this as a advertising expense that they can afford. The whole get money now and cry about it when people actually expect to collect what they were promised is ridiculous, where do they think the money comes from? If you want to say that this model is only sustainable as long as small business owners are incompetent then yes, lets say that. However, to say that this business model is bad based on Groupons lies is just ridiculous. No one is holding a gun to your head and saying, give us coupons for all your stuff.
- ahi 15y ago
  A mark's gullibility does not absolve the scammer.
edw 15y ago
Here's the money quote: > If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants. I found myself laughing villainously as I read that. Google offers to by Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme into overdrive. Oh, it feels so good! Google, I forgive you everything! By the way, didn't we all flip the scam bit on Groupon months ago when this article showed up here on Hacker News: Groupon in Retrospect (posiescafe.com) http://news.ycombinator.com/item?id=1698833 http://news.ycombinator.com/item?id=1698833
suking 15y ago
Almost starting to feel bad for Groupon... then I read their S-1.
ilkandi 15y ago
On the plus side, Groupon has high name recognition, an international rolodex of contacts with small businesses clients (whether or not deals were made), an international rolodex of customer names with contact info and preferences, huge number of international offices and sales staff, a large profit margin from the business clients, interest-free loans from customers in exchange for a pdf coupon, the clients handles delivery/fulfillment to the customer months to a year later (assuming the customer remembers the coupon exists). And more. They've got a TON of room to grow if they can plug any revenue leaks. Sure, a lot of places can handle local deals. What if Groupon starts synchronizing deals? Every hair salon 10km apart in every city and country gives a touchup for $20? All dance schools, first salsa lesson free? It could drive trends. A mobile app that tracks all customer clicks? Tied to a recommendation service that tells the customer to wait for an upcoming deal within a week, or tells the Groupon office the kind of deals they should pursue that month? A service to tell retail entrepreneurs the sales demographics per area and business? Sell retailer data to financial and IT services to help them manage and modernize their businesses? I see a lot of possibilities for a big network.
tokenadult 15y ago
I think this is the most interesting paragraph in the submitted article: "As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt. I strongly encourage every business that is about to go under to call Groupon. (Don’t tell them Rocky sent you.) It makes total financial sense--as a Hail Mary play. If you’re lucky, the upfront cash will be enough to help you stay afloat. If not, well, you were already going out of business. It may be your best option. In the short term, you’re actually helping Groupon because they’re being valued on revenue and no one is taking into account risk." If word of this gets around, the incentives set up by the typical Groupon agreement with a merchant will be responded to by merchants for whom those incentives are the most perverse. Groupon may discover that it is inexorably moving into the business of last-ditch financing for failing businesses.
rsheridan6 15y ago
Is it even established that companies lose money on Groupon customers? I usually spend over the face value on a Groupon, so the restaurant gets (bill - (value of groupon/2)). If the profit on a dinner for two is more than half the value of the groupon, which seems plausible, they're not losing money. Then there are the people who never redeem their groupons. I'm about to move to another and leave two groupons that I never got around to using unredeemed.
Bricejm 15y ago
If the numbers in the article are correct, an IPO might be the beginning of the end. As a public company they will have to submit to outside audits. Based on their business model and cash situation they might not be of 'Going Concern' much longer.
Apocryphon 15y ago
What are better alternatives to Groupon? shopkick, perhaps?
Terry_B 15y ago
I got stung the other day by a Groupon clone here in Australia. My wife asked me to buy the daily deal, which I did, without checking it properly. The business in question doesn't exist. Looks like the daily deal company did absolutely no checking that it was legit or the business did as this article suggests and knew they were going bankrupt anyway. I started asking around and found a few similar stories from friends and colleagues. Hoping to see all of this hit the news soon.
- forgingahead 15y ago
  Well that's fraud on an entirely different level from what this article suggests, but that's still crummy. Which clone was it?
  - Terry_B 15y ago
    Absolutely, but it's quite likely that it highlights a systemic problem with this type of business which the article discusses. Shadier business owners can abuse it. Rhymes with Groupon.
gfodor 15y ago
The bottom line is I have yet to hear Groupon share any metrics with the public on how much their product is, you know, actually successful. Regardless of the reason, be it that they can't measure it, or, more sinisterly, don't want to share it, you have to assume their business sucks or elthey're incompetent or else they'd be trumpeting the upside for businesses everywhere.
lsc 15y ago
take another look at that recipt. 1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk. 2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter. 3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per. 4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.) so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs. I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage. Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so. Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using. Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good. What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.
- qq66 15y ago
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mostlycarbon 15y ago
Given Rocky's claim that investing a large amount up front for a traditional advert placement is equivalent to receiving a short-term loan from Groupon for running a deal on the site, then Groupon is merely like all other direct marketing/direct response operations. So you can probably predict how successful Groupon could be by comparing it to something like Valpak. Despite the fact that Groupon shifts the marketing costs from the merchant to the customer, it probably won't affect couponing behavior in the long run. To me this is like chess where the players have switched sides after a match. It's the same game, but a new player gets the first-move advantage this time around. Groupon Now! seems slightly more interesting and possibly has more potential. My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be bought out by some media/new media conglomerate by 2014.
originalgeek 15y ago
I can state for a fact that as of January 2010, Groupon did no vetting of financials prior to doing a deal. All that was required was a conversation with a nice woman, who seemed way too smart to be an account rep. But hey, maybe a cubicle at Groupon was all her MA or MS could get her in the downturn. The bankruptcy theory presented by the author is correct. My family's shop in NYC was on the brink, and Groupon seemed like a possible salvation. We had nothing to lose, anyway. Groupon decided to run a deal for us, we worked out all the details, and waited. And waited. And closed the shop. Groupon called us to do the deal about 3 days after we closed the doors.
edanm 15y ago
This article has some serious problems. There's a huge anti-Groupon bias (apparently shared with most of HN). This is fine, it's ok not to like Groupon, but some of the points this article makes are absolutely terrible. For example, take this: "I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers. A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one." Let's look at what's happening here. There's actual, real-world evidence that the author may be wrong - small businesses are returning to Groupon. This doesn't make sense if Groupon is really such a terrible deal. So the author tries to explain this evidence. What's the best way to do this? Go talk to the business owners who return to Groupon, and ask them why. That's what most people would do when trying to understand their behavior. But instead, what does the author present? He talks to one of Groupon's competitors! The competitor, non-surprisingly, tries to dismiss this evidence. And he specifically tries to imply that the businesses doing this are not acting properly, comparing them to people who habitually overspend. I'm not saying the author is wrong - but this is not the right way to make this point, and is simply a way to take a dig at Groupon, and dismiss the people who might prove that Groupon is worthwhile. Or take this: "I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon." This is a cheap-shot, thrown in at the end of an (otherwise legitimate) paragraph. Either there are real cases or there aren't, but just saying "I've heard some people complaining" is just terrible reporting. If you think Groupon's done something wrong here, talk about it, don't just mention it offhand to tarnish their reputation. Conclusion: Like I said, I don't know whether Groupon is good or bad for businesses. I don't know if many people truly know, actually. But articles like this, which go out of their way to bash Groupon, are not the right way forward.
- pja 15y ago
  Right, because obviously a small business owner is going to be happy to tell some random journalist who phones them up, "Yeah, we did that third GroupOn deal because otherwise we weren't going to be able to pay the rent". They'll make up some waffle that regurgitates GroupOn talking points in order to justify their actions to an outsider without giving away the fact that the company is on the verge of bankruptcy & if word gets out all their staff will walk.
bennyk 15y ago
I have to say that there was interesting thinking going into the Groupon model.It seems that the business may use it as a lost leader to show and showcase other products and services. For the business warm bodies mean opportunity.Each system has flaws this one has been very well pointed out in the article and the risks seem worth it for many companies.How to eliminate abuse. That is the question
linuxhansl 15y ago
Yep. When Google offered $6bn for Groupon I was... surprised. What surprised me more at that time was that Groupon declined the - already exceedingly overpriced - offer. Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn (P/E of 1,139.40!!). Facebook is said to be worth $100bn. I think we collectively lost our value judgment when it comes to Internet companies.

392 points by charlief 15y ago

I don't know if it convinces me that Groupon is "poised for collapse", but it certainly exposes several risks in the business model (for Groupon, the merchant, and the consumer), as well as how competitors can take advantage of those.

Spyplane 15y ago
When you look at the $1bil they made last year in funding, and what amount they listed in their IPO paperwork, they certainly look and feel like a ponzi scheme. I hope they are not, but it feels that way. I'm staying as far away from that stock as possible.
- encoderer 15y ago
  This is true only if you make up a new definition of "ponzi scheme." I disputed this same point last week: http://news.ycombinator.com/item?id=2617760 http://news.ycombinator.com/item?id=2617760
jerf 15y ago
I went in with my metaphorical trigger finger on the "flag" button, but it does seem to add a new and useful perspective that I haven't seen yet. Explaining Groupon as a network of loans makes a lot of sense. In fact, as someone who has resisted the characterization of Groupon as a "Ponzi scheme" on the grounds that I prefer the term actually mean something specific, this has gone a ways to explaining how that may actually be true. But the interesting scheme isn't so much in the investors, where people have been talking about it, but in the way that businesses are being paid with revenues from the subsequent Groupons, and so on. There's a lot of loan risk in a lot of directions on Groupon's balance sheet. It seems to me they don't have to be off by much for it to crumble. "Collapse" in the title is not just a linkbait word, the author really outlines how the whole thing might very quickly collapse.
arturadib 15y ago
Agreed. It's a very insightful article on the pluses and minuses of their business model.

wccrawford 15y ago

Oh look, another 'Groupon isn't magic' post. Yes, you have to actually work to maintain those new customers, just like always. In fact, you'll probably have to work a little harder than normal, since their first experience at your business is at a huge discount. But treat them right and let them know what they're in for and it's no different than other other coupon scheme designed to lure customers in. Oh, except for being a huge buzzword right now and attracting more customers than would normally be possible. Yes, you heard that right, I'm saying that Groupon can be a really good thing for your business if you jump on now. But ONLY if you have properly prepared for it, and negotiated with Groupon correctly. Don't let them badger you into a bad deal for your business. You would be better with no deal than a bad deal.

saddino 15y ago
The problem is that there is no guarantee any of those customers are actually new. It appears that in many cases, most are ALREADY your customers and you're simply giving them discounts.
- wccrawford 15y ago
  That's almost always the case with coupons, though. Sure, you can exclude current customers under some coupon schemes, but you risk alienating them... And losing an existing customer is costly, since you put so much into gaining them in the first place.
  - brk 15y ago
    Right, but a "$2 off your next $20 order" coupon is much much different than a "$19 off your next $20 order" Groupon.
    - wccrawford 15y ago
      If you don't like the terms, don't sign up for it. As I said, Groupon isn't magic. Making a bad deal with them will not magically turn into a good deal. You have to use Groupon as a tool, not a genie.

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qeorge 15y ago

It seems his main point is this: Google Offers pays merchants faster (80% of the money goes to the merchant right away, vs 33% with Groupon). The OP expects this will force Groupon to make the same deal with merchants, which will change their business model, which will put them out of business. That or Groupon won't change its business model, and Google Offers will run them out of business by virtue of this better deal. IMHO, going from that small point to "Groupon is poised for collapse" is just a bit hyperbolic.

deleted 15y ago
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commandar 15y ago
The thing is, Groupon is already burning cash like it's going out of style with their current model, which is hugely lopsided in Groupon's favor compared to the merchant. If Google starts pushing things toward a position that's a bit more equitable for the merchant, it could end up being a huge problem for Groupon. The number of articles that have been published talking about how poorly Groupon works out for many merchants means there's a lot of room for somebody to step in with more favorable reimbursement and revenue-split terms. Groupon either has to match those or watch their userbase jump to the competition.
jacques_chester 15y ago
No small business worth its salt is going to turn down favourable terms like 80% in 4 days. Cash flow is life or death on a weekly basis for small businesses.

cletus 15y ago

This is one of the best and most damning analyses of Groupon I've seen yet, which is kinda surprising coming from TC but I guess it is a guest post. The biggest parts of this are the account risk, the needing to grow revenue to pay existing liabilities (which is and should be a huge warning flag for any enterprise) and just how much room there is for someone to do this better. My only fear is that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley.

ChuckFrank 15y ago
Based upon the mounting evidence about the condition of Groupon, cletus' fear "that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley." makes absolutely no sense. Suggesting that a poorly performing companies weak IPO, or otherwise, will taint other IPOs and prompt regulations makes no sense whatsoever. For the health and vigor of the tech markets, Groupon's IPO should be a spectacular failure based upon the poor business model and weaker financial position.
- cletus 15y ago
  Imagine a worst case scenario where Groupon files for Chapter 11 and defaults on all outstanding debts to merchants, which by that stage could amount to over a billion dollars (IIRC it's currently $280 million). Imagine that because of that lost revenue many small businesses end up collapsing. At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money. Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".
  - SwellJoe 15y ago
    I think the more dangerous result will be that the scheme continues to "work" for another couple of years, a half dozen competitors come along and run the same basic scheme (with tweaks to make the new businesses "unique"; maybe they go for particular niches currently unserved or whatever), those companies also have explosive IPOs, and then the whole thing comes crashing down in a couple more years when the IPO money runs out. One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved. It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.

kul 15y ago

Very interested to see how this plays out, because there's a faltering consensus around Groupon, and it's getting closer to their IPO. See: http://www.guardian.co.uk/business/2011/jun/10/only-fool-invest-groupon-analyst http://www.guardian.co.uk/business/2011/jun/10/only-fool-inv... It reminds me a little of when there were a few dissenting voices claiming the US housing market was due a correction and yet prices kept going up.

rwmj 15y ago
Good to see at least one article about this in the mainstream media. Have there been any others?

mcdowall 15y ago

Having dealt with the local advertising model myself (restaurant virtual tours) I can testify how god damn hard it is to get money out of small business owners so the success of Groupon is a surprise to me. From a consumer perspective I unsubscribed a few months ago as I really didnt want to hear about a Botox or Massage deal each and every morning. It was good for xmas presents I will admit but in my local area the variety of the offers was somewhat limited (and Its by no means a small town), I shouldnt imagine I will check the site until around mid December again.

raganwald 15y ago
I can testify how god damn hard it is to get money out of small business owners so the success of Groupon is a surprise to me. Well, now we know how to get $62,500 out of a small business: Offer them $7,000 within about 5 days. This is the salient point of the article: Groupon is more than just a marketing vehicle, it has a financing angle to it that should be evaluated in terms of risk.
- larrys 15y ago
  True and there is also (and I can't think of the name) a psychological principle for this which is how someone will pay money to insure against an event with a negative outcome but not to wager on something. Umm. I think it might be called "Prospect Theory" or some variation like that.

deleted 15y ago

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arturadib 15y ago

Insightful article, but notice that the business model being criticized is in many ways well known (and successful): namely, that of book publishers. When an author deals with a book publisher, he/she gives up some of their future revenues in exchange for cash in advance and publicity. Likewise, when a local business deals with Groupon, they are giving up part of their revenue in exchange for upfront cash and publicity. The main difference might be in the actual numbers (cash upfront, revenue share %, etc). The risks pointed out remain, and are very real though.

larrys 15y ago
Authors don't really have ongoing costs once they get the money though like a restaurant as one example would. Publishers also handle promotion and distribution as well. You can self publish of course but then you don't normally get the same legitimacy, distribution, and other intangible benefits.
tomp 15y ago
Except for the upfront payment, which is obviously a sunk cost, book publishers have no other liability. Unlike Groupon, which might have to reimburse its customers if a client business goes under. Furthermore, AFAIK author deals are screened/filtered, a bad book will not get published (not that this is a 100% accurate process, see for example 4 Hour Work Week). Judging from the article, Groupon does little screening, so their risk is much greater.
- commandar 15y ago
  >(not that this is a 100% accurate process, see for example 4 Hour Work Week). While I got a chuckle out of this, given the financial success of the book, it's a good book from the publisher's perspective.
  - tomp 15y ago
    Actually, that's exactly what I meant. I can't remeber where I read it, but Tim claimed that many publishers rejected him, before he found that one that wouldn't. Or am I thinking of the wrong title?

bostonvaulter2 15y ago

The part about how groupon will refund the price of the groupon if the business goes of out of business is interesting because Living Social specifically does not do that.

larrys 15y ago
If there are some nice public failures with people complaining I'm sure states will fix that with some legislation.
ilkandi 15y ago
I've been refunded a couple of times from other deal sites when the business went bankrupt. It's just good customer service to do so.

ig1 15y ago

All these attacks rest on the assumption that Groupon aren't going to change their business model at all. It's seems a near certainty that they're going to move into the dynamic yield management business which is likely to be highly profitable. For a lot of businesses their excess capacity is a lost cost anyway. They have to pay their staff regardless or not they do work. A customer might cost $X to service, but that completely ignores the fact that the company would have to pay $X even if that customer wasn't there. Sure Groupon might not be matching that spare inventory to it's deals with great precision at the moment, but it's only going to be a matter of time. Look for example at GrouponLive, their partnership with Livenation who are the largest entertainment ticketing company in the world. Does anyone seriously think Livenation are having wool pulled over their eyes ? - they know that yield management is important and Groupon are probably going to become the leaders in that space.

powera 15y ago
I'm sorry, but justifying a $15 Billion (with a B) valuation on a business that Groupon isn't even in yet is pointless. It smacks of Enron, to be honest.
- ig1 15y ago
  What percentage of Amazon's income comes from Book sales ? A large amount of Amazon's valuation came from the fact that they'd be able to extend and become the dominant online retailer in a huge number of product categories.
  - ig1 15y ago
    Are people really down-voting a comment made in good faith purely because they disagree with it, or is there somethingly fundamentally wrong with my statement which I'm just completely missing ?
    - jbellis 15y ago
      I can't speak for others, but I downvoted because the time to figure out your business model is long before IPO. So a claim that an "attack" isn't valid because it ignores the possibility of radical business model changes isn't worth discussing.

dr_ 15y ago

Not sure if I entirely agree with this analysis. There's an element of inventory management which Groupon allows for, which has previously been unheard of for most small businesses. Maybe if you realize you are definitely getting x number of customers or x number of dollars), you can better manage your cash flow. Take the photo of the receipt provided in the article. A coke costs $2.00, and presumably it's a fountain drink, cause it mentions the refill is free. We've all been exposed to this, and let's face it, it's a blatant ripoff, but on some level its understandable - it's a way for the restaurant to make some additional cash, perhaps because the traffic is sporadic or perhaps to save up for a rainy day. But does coke really need to cost $2.00, if you have a better expectation of how much product you are definitely going to sell? My guess is, probably not.

ChuckFrank 15y ago

With mounting evidence of Groupon's weak financials and long term business sustainability, we should all advocate against investing in Groupon. The better our market segment wisdom, the better for all of us. If we let crap float to the top, then top performing companies will always have their market stigma to overcome. See biotech 2000-2005. Besides Mason has already told us that Groupon is a joke when he told Charlie Rose that Groupon is to tech what Nsync was to pop. High-flying, fast - crashing products poised for brief nostalgia, and obscurity. http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/ http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/ O ps. my favorite quote of this emerging IPO debacle has been thus far.. "Groupon's IPO prospectus should raise several red flags in a sensible investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving more red flags than a May Day parade." Now that's a great visual. http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/ http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsk...

uptown 15y ago

I think that Groupon is likely to adjust their vig if they start to see their momentum decline. Instead of 50%, they take 40% or 30% …. at which point they can circle-back and offer their services to all of the business that may have declined their services due to the steep percentage of the offer they demanded. Sure, this means less revenue coming out of each deal, but it seems to give them a quick way adapt.

ajays 15y ago

One thing that a lot of analyses fail to account for are the number of Groupons that go unused. I would love to see some figures on how many Groupons are never redeemed (for whatever reason). I had some friends visiting SF, and they had bought Groupons from various outfits for the trip. But they ended up not using a few of them, and gave them to me. Chances are I'll end up using them, but I wonder: how many such Groupons expire unused?

ethank 15y ago
I would love to see the breakage figures on Groupon. I haven't looked at the S1, but do they account for them in revenue?
jrwoodruff 15y ago
According to the article, it doesn't sound like they really keep track of redeemed vouchers. Because some merchants track redemptions on paper, Groupon has no way of knowing how many unredeemed Groupons are outstanding.
ilkandi 15y ago
It probably works out as high as regular gift cards. They're easier to find (just search your email) but they're easier to buy so one can get much more of them. I have friends who bought "pay $X for 10 workouts" but only end up going once before it expired.
gojomo 15y ago
They make a lot from vouchers that are never used. (The term of art for such revenues is 'breakage'.) For a stored-value medium that's like a gift card, many states prohibit an expiration-to-zero-value. Groupon has been sued a bunch of times over this; at least in those states, I think their current policy is that the business must still honor the Groupon for the original purchase price (but not the ~2X face value). This blog post by Andrew Mason suggested lawsuits were unnecessary because customers unhappy for any reason, including expiration policies, could always rely on 'the Groupon Promise' for a full refund: http://www.groupon.com/blog/cities/groupon-organizes-class-action-against-itself/ http://www.groupon.com/blog/cities/groupon-organizes-class-a... However, if you try to get a refund on an expired Groupon, they'll reject your request. So Mason's blog post and 'the Groupon Promise' are deceptive... and Groupon probably deserves to be sued over the gap between the unequivocalness of their 'promise' and the way they carve out exceptions in practice. They talk the talk of a 'customer is always right' retailer, but their model seems to require them to be stingy with refunds.

lichichen 15y ago

HN: just out of curiosity is there any examples of companies that have tanked based on speculation of failure regardless of track records? Ie: Speculation leads to lower investor confidence leading to pulling out of investments and so on so forth

raganwald 15y ago
When you say "regardless of track record," what is being discussed Ad Nauseum is whether Groupon has a track record of success or not. This is different than a company that has a consensus track record of success but is battling some unrelated speculation. It's almost the other way around: Groupon spends $1.43 to buy $1.00 of revenue, but boosters are speculating that they can pivot their model or harvest more revenue from their merchants and email list to make $1.44 revenue from every $1.43 they spend.
aninteger 15y ago
Sega and the repeated negative news on the Dreamcast. It was a great system, and ahead of it's time (compared to the PS1).

deleted 15y ago

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justin_vanw 15y ago

It's almost absurd how closely Groupon is following the classic 'tech bubble' road to disaster. 1. Hype (check) 2. IPO talk (check) 3. Turn down acquisition at incredibly high P/E (check) 4. Superbowl Advert (check) 5. IPO just in time to avoid running out of money (on the way) 6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets 7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced 8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.

encoderer 15y ago
You left out "generate massive sums of actual revenue from real, paying customers, and become the fastest growing company by revenue in history." I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.
- gaius 15y ago
  Groupon spends $1.43 for every $1 in revenue. Hell they could just not do any business and increase their revenue 43% overnight...
  - jaredsohn 15y ago
    No; that would increase their profit at the expense of revenue.
  - 3pt14159 15y ago
    Does that spending include their dividends or other cash outflows to the founders? Because if it is straight spending money they are in trouble.
    - imjustatechguy 15y ago
      It doesn't include the hundreds of millions which have been cashed out -- there numbers would look even worse if they included those numbers.

elb0w 15y ago

Anyone else getting tired of these? Why are these companies not being held responsible for their own negligence? If you do not do the math and cannot afford to lose the money then how dare you agree to the terms. This is not on Groupon or any other Daily Deal service. It solely relies on the Small Business owner that does not do his due diligence. This model is no different than bulk purchasing from a supplier. However, the supplier still makes money because they have figured out how much they can give to still turn a profit. Small business owners need to either look at how much they stand to lose or take this as a advertising expense that they can afford. The whole get money now and cry about it when people actually expect to collect what they were promised is ridiculous, where do they think the money comes from? If you want to say that this model is only sustainable as long as small business owners are incompetent then yes, lets say that. However, to say that this business model is bad based on Groupons lies is just ridiculous. No one is holding a gun to your head and saying, give us coupons for all your stuff.

ahi 15y ago
A mark's gullibility does not absolve the scammer.

edw 15y ago

Here's the money quote: > If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants. I found myself laughing villainously as I read that. Google offers to by Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme into overdrive. Oh, it feels so good! Google, I forgive you everything! By the way, didn't we all flip the scam bit on Groupon months ago when this article showed up here on Hacker News: Groupon in Retrospect (posiescafe.com) http://news.ycombinator.com/item?id=1698833 http://news.ycombinator.com/item?id=1698833

suking 15y ago

Almost starting to feel bad for Groupon... then I read their S-1.

ilkandi 15y ago

On the plus side, Groupon has high name recognition, an international rolodex of contacts with small businesses clients (whether or not deals were made), an international rolodex of customer names with contact info and preferences, huge number of international offices and sales staff, a large profit margin from the business clients, interest-free loans from customers in exchange for a pdf coupon, the clients handles delivery/fulfillment to the customer months to a year later (assuming the customer remembers the coupon exists). And more. They've got a TON of room to grow if they can plug any revenue leaks. Sure, a lot of places can handle local deals. What if Groupon starts synchronizing deals? Every hair salon 10km apart in every city and country gives a touchup for $20? All dance schools, first salsa lesson free? It could drive trends. A mobile app that tracks all customer clicks? Tied to a recommendation service that tells the customer to wait for an upcoming deal within a week, or tells the Groupon office the kind of deals they should pursue that month? A service to tell retail entrepreneurs the sales demographics per area and business? Sell retailer data to financial and IT services to help them manage and modernize their businesses? I see a lot of possibilities for a big network.

tokenadult 15y ago

I think this is the most interesting paragraph in the submitted article: "As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt. I strongly encourage every business that is about to go under to call Groupon. (Don’t tell them Rocky sent you.) It makes total financial sense--as a Hail Mary play. If you’re lucky, the upfront cash will be enough to help you stay afloat. If not, well, you were already going out of business. It may be your best option. In the short term, you’re actually helping Groupon because they’re being valued on revenue and no one is taking into account risk." If word of this gets around, the incentives set up by the typical Groupon agreement with a merchant will be responded to by merchants for whom those incentives are the most perverse. Groupon may discover that it is inexorably moving into the business of last-ditch financing for failing businesses.

rsheridan6 15y ago

Is it even established that companies lose money on Groupon customers? I usually spend over the face value on a Groupon, so the restaurant gets (bill - (value of groupon/2)). If the profit on a dinner for two is more than half the value of the groupon, which seems plausible, they're not losing money. Then there are the people who never redeem their groupons. I'm about to move to another and leave two groupons that I never got around to using unredeemed.

Bricejm 15y ago

If the numbers in the article are correct, an IPO might be the beginning of the end. As a public company they will have to submit to outside audits. Based on their business model and cash situation they might not be of 'Going Concern' much longer.

Apocryphon 15y ago

What are better alternatives to Groupon? shopkick, perhaps?

Terry_B 15y ago

I got stung the other day by a Groupon clone here in Australia. My wife asked me to buy the daily deal, which I did, without checking it properly. The business in question doesn't exist. Looks like the daily deal company did absolutely no checking that it was legit or the business did as this article suggests and knew they were going bankrupt anyway. I started asking around and found a few similar stories from friends and colleagues. Hoping to see all of this hit the news soon.

forgingahead 15y ago
Well that's fraud on an entirely different level from what this article suggests, but that's still crummy. Which clone was it?
- Terry_B 15y ago
  Absolutely, but it's quite likely that it highlights a systemic problem with this type of business which the article discusses. Shadier business owners can abuse it. Rhymes with Groupon.

gfodor 15y ago

The bottom line is I have yet to hear Groupon share any metrics with the public on how much their product is, you know, actually successful. Regardless of the reason, be it that they can't measure it, or, more sinisterly, don't want to share it, you have to assume their business sucks or elthey're incompetent or else they'd be trumpeting the upside for businesses everywhere.

lsc 15y ago

take another look at that recipt. 1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk. 2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter. 3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per. 4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.) so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs. I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage. Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so. Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using. Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good. What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.

qq66 15y ago

deleted 15y ago

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mostlycarbon 15y ago

Given Rocky's claim that investing a large amount up front for a traditional advert placement is equivalent to receiving a short-term loan from Groupon for running a deal on the site, then Groupon is merely like all other direct marketing/direct response operations. So you can probably predict how successful Groupon could be by comparing it to something like Valpak. Despite the fact that Groupon shifts the marketing costs from the merchant to the customer, it probably won't affect couponing behavior in the long run. To me this is like chess where the players have switched sides after a match. It's the same game, but a new player gets the first-move advantage this time around. Groupon Now! seems slightly more interesting and possibly has more potential. My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be bought out by some media/new media conglomerate by 2014.

originalgeek 15y ago

I can state for a fact that as of January 2010, Groupon did no vetting of financials prior to doing a deal. All that was required was a conversation with a nice woman, who seemed way too smart to be an account rep. But hey, maybe a cubicle at Groupon was all her MA or MS could get her in the downturn. The bankruptcy theory presented by the author is correct. My family's shop in NYC was on the brink, and Groupon seemed like a possible salvation. We had nothing to lose, anyway. Groupon decided to run a deal for us, we worked out all the details, and waited. And waited. And closed the shop. Groupon called us to do the deal about 3 days after we closed the doors.

edanm 15y ago

This article has some serious problems. There's a huge anti-Groupon bias (apparently shared with most of HN). This is fine, it's ok not to like Groupon, but some of the points this article makes are absolutely terrible. For example, take this: "I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers. A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one." Let's look at what's happening here. There's actual, real-world evidence that the author may be wrong - small businesses are returning to Groupon. This doesn't make sense if Groupon is really such a terrible deal. So the author tries to explain this evidence. What's the best way to do this? Go talk to the business owners who return to Groupon, and ask them why. That's what most people would do when trying to understand their behavior. But instead, what does the author present? He talks to one of Groupon's competitors! The competitor, non-surprisingly, tries to dismiss this evidence. And he specifically tries to imply that the businesses doing this are not acting properly, comparing them to people who habitually overspend. I'm not saying the author is wrong - but this is not the right way to make this point, and is simply a way to take a dig at Groupon, and dismiss the people who might prove that Groupon is worthwhile. Or take this: "I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon." This is a cheap-shot, thrown in at the end of an (otherwise legitimate) paragraph. Either there are real cases or there aren't, but just saying "I've heard some people complaining" is just terrible reporting. If you think Groupon's done something wrong here, talk about it, don't just mention it offhand to tarnish their reputation. Conclusion: Like I said, I don't know whether Groupon is good or bad for businesses. I don't know if many people truly know, actually. But articles like this, which go out of their way to bash Groupon, are not the right way forward.

pja 15y ago
Right, because obviously a small business owner is going to be happy to tell some random journalist who phones them up, "Yeah, we did that third GroupOn deal because otherwise we weren't going to be able to pay the rent". They'll make up some waffle that regurgitates GroupOn talking points in order to justify their actions to an outsider without giving away the fact that the company is on the verge of bankruptcy & if word gets out all their staff will walk.

bennyk 15y ago

I have to say that there was interesting thinking going into the Groupon model.It seems that the business may use it as a lost leader to show and showcase other products and services. For the business warm bodies mean opportunity.Each system has flaws this one has been very well pointed out in the article and the risks seem worth it for many companies.How to eliminate abuse. That is the question

linuxhansl 15y ago

Yep. When Google offered $6bn for Groupon I was... surprised. What surprised me more at that time was that Groupon declined the - already exceedingly overpriced - offer. Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn (P/E of 1,139.40!!). Facebook is said to be worth $100bn. I think we collectively lost our value judgment when it comes to Internet companies.