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When discussing Groupon, it's quite clear: the group buying business model is financially viable. For Groupon. What's less clear: whether Groupon's business model is financially viable for businesses.

One of the reasons it's not clear is that many -- if not most -- of the local business owners who have tried Groupon don't publicly reveal detailed results of their Groupon campaigns.

While some business owners have expressed questions about their Groupon experience, others seem very satisfied. But thanks to Jessie Burke, who owns Posies Cafe in Portland, Oregon, we now know what a Groupon-gone-wrong looks like:

We were bombarded the first weekend after our feature because our feature had come out a month late, and unfortunately coincided with the Kenton Library’s grand opening. Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who tipped based on what they owed (10% of $0 is zero dollars, so tossing in a dime was them being generous).

After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally couldn’t not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month.

While Burke and her business' experience may be on the extreme end of one side of the spectrum, it does confirm what some have suggested: Groupon can become a nightmare for small, local businesses that are unprepared for a 'loss leader' campaign at scale. Of course, it's easy to underestimate the 'loss' in loss leader here. After all, in response to criticisms about the financial viability of Groupon campaigns for businesses, many argue that Groupon customers will likely spend more than the value of the Groupon, and that these campaigns are profitable over the lifetime of a customer.

To be sure, Groupon is appealing to the local business owner. It has a large, loyal audience and can thus drive a lot of sales. And unlike traditional advertising popular with local businesses, vendors don't pay anything out of pocket. They simply give Groupon a hefty commission. On paper, such an arrangement is music to the ears of local business owners, many of whom are necessarily weary of spending money they often don't have on traditional advertising that may or may not deliver results.

But it's becoming quite clear that Groupon's large, loyal audience may not be as attractive to vendors as it is valuable to Groupon. A sizable portion of this audience -- perhaps the majority -- consists of individuals who are likely more interested in a bargain than they are in becoming a loyal patron to the businesses where they redeem Groupons.

There's nothing inherently wrong with this. Bargain-hunters are plentiful these days, and most businesses shouldn't expect that every customer who walks in the door will instantly become a loyal, profitable customer. Yet at the same time, Groupon's entire value proposition to local vendors is predicted on the assumption that by offering a discount to its massive audience, businesses can cultivate enough loyal, profitable customers to make a deal on Groupon a worthwhile thing. Groupon promotes this assumption.

Obviously, Groupon can't guarantee loyal, profitable customers, and technically, it doesn't. But it sure has done a good job marketing itself as a source of new customers who are likely to spend more, and keep coming back. The Posies Cafe experience shows that a Groupon that's 'too successful' might one day mean those customers have nothing to come back to.

The lesson here for local businesses: always look beyond the hype. Due diligence is a must. That means running the numbers beforehand and considering the many risks before doing a Groupon deal. When it comes to marketing campaigns for local, brick-and-mortar businesses, ROI is still king. When and how you pay for the campaign doesn't really matter if there's no ROI.

At the same time, it wouldn't be fair to put the entire blame for failed Groupons on entrepreneurs like Burke. Running a small, local business is tough, and it's in Groupon's interest to be mindful of the needs of those it claims it's trying to help. Redfin's Glenn Kelman writes:

Building sustainable partnerships with low-margin small businesses is hard. Groupon can do it, but first it has to try.

Kelman hints at something key: Groupon doesn't yet seem to realize that what's good for it isn't necessarily good for its local business customers. And because of its financial success, it doesn't really have an incentive to acknowledge this.

Right now at least. Case in point: Burke claims that Groupon first sought to keep 100% of the revenue her business' deal generated! Further, she and others she knows were apparently never offered the ability to cap how many Groupons were sold for her business, despite the fact Groupon claims this is offered to participating businesses.

Burke's story caught the attention of Andrew Mason, Groupon's CEO. He responded on the Groupon blog, writing:

Now that we know Posie’s had a problem, we have reached out to them so we can help. We’ve featured hundreds of businesses similar to Posie’s with great success, so we’re eager to learn what went wrong.

According to Mason, 97% of the businesses who run a deal on Groupon want to do it again, and he cites a testimonial from another Portland business owner who has nothing but kind words for the company.

The problem: the testimonial was sent to Groupon "shortly after being featured" so it's unclear how the owner determined that "the Groupon member [is] a high grade customer, operating at a sophistication level far above that of the typical bargain hunter/coupon cutter". The business owner also boasted about how his website received 2,500 "hits" on the day of the Groupon, 250 "hits" the day after, and a "still high" 85 "hits" on the date he wrote his review.

Noticeably lacking: discussion of the number of Groupons that were redeemed thus far, how many customers spent more than the value of the Groupon, how many have returned, and the overall ROI of the campaign.

Some of those metrics, of course, are difficult to track. Not every business will religiously measure the dollar amount of each Groupon purchase, it's almost impossible to determine whether Groupon redemptions are coming from existing customers or a new ones, and it's equally tough to track how many of the new customers keep coming back. So it comes down to faith: if you're in love with the Groupon model and you don't find yourself on the brink of bankruptcy after running a Groupon deal, chances are you'll be pleased with the experience, even if you don't know whether it helped your business.

On Burke and Posies Cafe, Mason seems concerned, but one has to wonder if Groupon's financial success hasn't gone to its head just a little bit. Yesterday, news broke of a fraudulent Groupon deal for photography services that Groupon had to take down. On the surface, the deal was clearly going to be difficult for the photographer to honor, and to boot the photographer's website apparently contained photos she didn't take.

The fact that Groupon would sell more Groupons than a single photographer could reasonably fulfill in a year in hints that Groupon is primarily focused on its own business, which would be problematic as Groupon's desire to maximize its revenue may put it in conflict with the interests of its business customers and the consumers who buy Groupons.

Inevitably, Groupon will alienate both businesses and consumers if it doesn't recognize that there is such a thing as a deal that's too good to be true.

Patricio Robles

Published 17 September, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2435 more posts from this author

Comments (18)

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Thx for summing up the long debate about Rosies. There are some intersting comments in the original Redfin-Blogpost. However one thing you pointed out is critical:

"Not every business will religiously measure the dollar amount of each Groupon purchase, it's almost impossible to determine whether Groupon redemptions are coming from existing customers or a new ones, and it's equally tough to track how many of the new customers keep coming back."

Thats the point: I have followed the local shops and restaurants offering groupons in my town. I have found least to no one having any kind of CRM-attitude. To them Groupon is a very effective way of wasting the famous 50 % of advertising. People come, shop, quit and that's about it. No follow up, no address asked, no e-Mail, no nothing.

I pray by seeing that it really works they come to understand "performance marketing". This is to say it is not the Dark Side of Groupon but the Dark Side of lacking Customer Relationship Management.

over 6 years ago



I normally don't post but I felt compelled in this situation because the lack of success falls squarely on the Posies owner.  She clearly has no marketing or advertising experience whatsoever.  And it's not Groupon's job to educate her. 

I bet if she had a caps on things such as number sold, number purchased, number used at one time, day or time it could be used and new or returning customer it could have been successful.  But if you run a "deal" with loopholes that people can take advantage of they will.  It's as simple as that. 

over 6 years ago


Julie Baumler

I've seen many small businesses lose a lot of money on advertising, coupons, etc.  The fact is that if a small business is too successful with any advertsing campaign, they will be in just as much trouble as if they spend a lot of money on an advertising campaign that is not successful.  Having read about Posies' experience, including their own blog entry on it, I really thought that Posies came out looking worse than Groupon.  Whether or not a marketing or advertising company has the companies best interests in mind or not, only the company has any hope of determining what will work for them.  If the Groupon did not appear when it was expected to and a later date would have been problematic, then at that point Posies needs to take responsible for telling Groupon that the alternative date is unacceptable. 

over 6 years ago


buyer beware

Groupon referred to 1,400 affiliates that help drive its Gap and other promotions.

I have noticed two affiliates lately post Groupon deals on discount websites and leave off Groupon's name from the details. If affiliates are finding putting Groupon in the title cuts the numbers clicking through, that is bad news for Groupon.

over 6 years ago


Max Goldberg

It is important for a retailer to do some basic financial analytics before putting any consumer offer into the marketplace.  Some questions need to be asked:

1. How much extra business do I expect and can I handle the increased traffic?

2. How much will it cost to deal with the extra traffic?

3. What metrics can be put in place to track who uses and coupon and how can I incent first time customers to return?

4. Should there be an end date and other restrictions on the coupon?

If a retailer considers these and other questions, he/she should be able to make an educated judgement about participating in a Groupon deal.  Without pre-analysis, the retailer is potentially risking the economic well-being of the business.

over 6 years ago


mary hodder

Hi, I made similar arguments recently at the Techcrunch conf in July to a friend who is found/ceo of a large ad network, and who just launched a similar Groupon-style site. Basically.. as a user, I get that I'm cherry picking deals and frankly there are so many deals that I could just jump from deal to deal. Sometimes I do stay a customer of the business that is new to me.. but frankly... and this was my argument.. with Groupon, Living Social, Yelp, Zozi etc emailing me daily deals on service sector goods.. not to mention Ruelala, Ideeli, Gilt and Bluefly doing same for products.. why would I not develop the mentality that everything should come at a steep discount? Ultimately that's not sustainable. We are training customers... just like Amazon did in 1999 when they gave out $25 off coupons where you could just buy a $20 book.. plus shipping and essentially get everything for free... to feel that everything should be free or nearly free. However, unlike when Amazon did it in 1999 with venture dollars.. the new game is to do it with small businesses.. a restaurant.. a designer.. and while the .com is making money off the commissions.. the small businesses are taking it in the shorts. I don't think this is viable in the current model .. and will likely have to get real for both the small businesses and the .coms engaging in the model. mary

over 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy


"And it's not Groupon's job to educate her."

You're absolutely right. Groupon has no incentive to help its customers obtain value from its service. Unless, of course, Groupon hopes to be in business in 5 years.

If you treat your customers like an ATM machine, and aren't as interested in their success as your own, you might make a lot of money. But don't expect it to last.

Fundamentally, Groupon and local businesses have a conflict of interest. Groupon has every incentive not to limit deals to a certain number of purchases, but most businesses do. Groupon claims that it offers businesses the ability to cap their deals (Burke says this wasn't offered to her, or other businesses who used Groupon) but even if you believe Groupon over Burke, it's easy to see that Groupon has every reason to favor businesses who don't want to cap their deals, and has little incentive to convince those businesses that caps are actually a good thing.

Absent management smart enough to realize that the conflict of interest exists, and wise enough to do something about it, this will not end well.

over 6 years ago



I think group buying can be a powerful tool for many small businesses when used correctly and there is a choice of sites that a merchant can partner with.  However increasingly Groupon's behaviour suggests that they are not aligned with the interests of their merchants and are increasingly telling them how to run their business.

In the UK and Europe Groupon has a policy of trying to get merchants to commit to a two year exclusive which is excessive by any measure. And because most of these merchants are relatively small (like Posies Cafe) they can bully them if they need to.  I have heard horror stories about Groupon screaming at merchants and even threatening not to pay merchants if they work with anyone else. 

Merchants can do more to protect their revenues and rights but Groupon should be careful not to abuse it.

over 6 years ago



Great Article! Groupon makes its money by taking a cut from the businesses so the increased competition will drive that price down...

over 6 years ago


Joan T

Very informative! You should know how to think first before doing group buying by first conducting a research about a deal site. If you are planning to start buying a deal, you should pick which site you should enter. If you want a list of different kinds of group buying websites, you can go to www.GroupBuyUnited.com. This website lists a variety of deal sites which you can choose from.

over 6 years ago



If Groupon wants to continue to be successful they need to start giving good counsel to their customers. It was a good move for LivingSocial to release a merchant bill or rightssince Groupon has brought on this bad press.

over 6 years ago


Scott Green

As a pseudo-competitor to Groupon, I'm not surprised at the sentiment expressed in this article.  The "Groupon phenomenon" has generally been good for consumers, and is clearly good for Groupon -- but probably not good for a sizable number of businesses using it to promote themselves.  Business owners need to think very carefully about what they're trying to achieve, because it is extremely expensive.....

Here's a little more of our point of view: http://offeretti.wordpress.com/2010/10/05/whats-the-deal-with-deal-of-the-day-sites/

over 6 years ago


Jay R

Groupon's model is great now but so ridiculously unsustainable-  the only folks that win are Groupon themselves.  The last time I checked, all parties have to win to build and sustain an equitable long term relationship.  They will run out of businesses in due time and you are only as healthy as your customers.

We have launched MerchantRock.com as a platform for Groupon merchants to share their stories and raise awareness.   here is our slogan:

"Where merchants gain strength by sharing knowledge and ideas to increase their profits, not Groupon's.

over 6 years ago


Nick Jones

I Think the only winner is Gorilla Groupon here. In a short time it will run out of business to rip off.

about 6 years ago



I read this post and all of the comments thus far. All very good. I set up small businesses and run one. Four years in, I learned to track everything before spending a dime on a marketing pitch. 4 W's: what, when, where, who. If you cannot answer these questions about your target customers, save your money until you can. There is a local spa running Groupon specials. Let's say half-hour commitment to each purchase, how can this spa afford a 50-60% revenue cut for months?! It can't, at least not at the level required to gain spa loyalty. In the "old days" a barber in town, new guy, would travel to retirement homes and invalids on Mondays for volunteer cuts. Where'd the family of the retirees go for cuts during the week? That is the type of marketing a new business needs. Not, come in through the door while my overwhelmed employees give you crappy service with attitude and treat you as the "Internet geek" because you have a Groupon.

about 6 years ago


Deck Cleaning

From my conversation with them, they wanted me to discount 50% and they were to get 60% of that discounted amount. So that left me with 30% of the original that did not even cover the costs.

It may work for some but for service companies, i would run.

about 6 years ago


Small Business Survivor

I am in a competitive industry where several of my competitors have gone to groupon.  They run deals constantly in order to generate revenue because they are offering groupons at a price that is lower than production costs. 

I have done my homework.  I know how much things cost, and these companies are generating hundreds of thousands of dollars of revenue through Groupon, but in the end, if the amount of money required to fulfill the gift cert is greater than the value of the revnue received, you end up with a ponzi scheme where the first people in will get there orders filled, but in the end, the money, no matter how vast...will run out.

I agree with those who indicate that Groupon is in it for themselves.  There is no way that they can take as much as the do, and allow their business partners enough margin to grown and thrive.


almost 6 years ago



All these companies complaining about Groupon needs to educate themselves in marketing. Groupon is in advertisement, has millions of members that they bombard (email) daily with your store name. If you choose to go this route and unprepared for the consequences your store deserves to fail.

about 5 years ago

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