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.