Groupon’s Crummy Business Model Is Finally Dead. Hooray!

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Aug. 14 2012 6:19 PM

Ding Dong, Daily Deals Are Dead

The thrilling demise of Groupon’s crummy business model.

(Continued from Page 1)

The fact that even Groupon is no longer banking on Groupons is fantastic news for everyone, especially all of us who are sick of morning email deal spam. But the biggest beneficiaries of Groupon’s problems are the world’s small-business owners, people who will no longer be taken in by its terrible deals. Today, Groupon’s stock is down nearly 30 percent. Its demise may not be imminent, but it seems assured. Let’s all rejoice.

This might sound harsh. After all, even if daily deals are a bad deal for small businesses, owners are signing up for them willingly. Why should we hate Groupon—a firm that is, after all, saving people money—for engineering these deals?

The trouble is—as Agrawal and many small business owners have documented—there’s ample evidence that Groupon’s sales reps never adequately explain the risks, and really exaggerate the rewards, of signing up for a deal. Because they work on commission, and because Groupon and its investors grew addicted to unsustainable growth rates, the firm’s sales team is under enormous pressure to keep signing up more businesses or to make deals that are even more lopsided in Groupon’s favor. They often try to get a huge share of revenue—they even ask for 100 percent of the deal. They don’t give businesses much data on how well similar deals have worked out for other businesses. (For instance, how many new customers did the businesses get? How many people spent more than their coupon amount—and how much more?) And they never explain the most important fact about Groupon users: Most of them are looking for a deal, and they’re unlikely to keep coming back to your business.

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This isn’t to say that Groupons are always a terrible deal for businesses. Agrawal says that, among other things, if your business is brand new; if you offer subscriptions that can lock customers in to a long-term deal (say, you run a yoga studio); if you’re selling an event with excess capacity (like a concert); or if you’re going out of business (in which case the Groupon is a Hail Mary pass) then Groupon might be for you. According to Yipit, a company that tracks the daily deals industry, Groupon has been signing up more and more “repeat” merchants over the last year—companies that like their Groupon experience so much that they decide to do it again. Sean Spielberg, a Yipit analyst, told me that in the second quarter, repeat merchants represented the majority of Groupon’s overall gross billings.

Agrawal sees this as evidence that Groupon’s merchant base is narrowing down to just the businesses that can do well with such promotions. That’s certainly good for the small business community, but it isn’t good for Groupon, which sold itself as a company with limitless growth potential. That’s why, now, it’s talking up other products besides coupons.

On Twitter yesterday, Agrawal said that he’s tempted to write a four-word story in response to Groupon’s earnings. What are the four words? “I told you so.

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