When you get right down to it Groupon is a hard money lender for ailing businesses, which is why Wall Street jumped all over the Groupon IPO like they did Sub-Prime mortgage lenders in the early 2000′s. I mean, think about it. What business in their right mind would discount their product or service between seventy and ninety percent in order to gain new customers?
The theory behind the Groupon pitch is that the ‘daily deal’ phenomenon brings businesses more first-time customers who can then be converted into repeat customers. It’s complete hogwash. Deal seekers are not ‘pay full retail seekers’, not when they bought a Groupon and not after they redeem it.
Numerous consumer surveys have revealed a lack of loyalty on the part of Groupon buyers beyond their initial purchase and redemption of a Groupon with a particular business establishment. In short, buyers get their deal and they don’t come back unless they get another deal.
Furthermore, surveys and ample press coverage regarding the impact Groupon’s have on most businesses prove conclusively the bias is negative. Businesses issuing Groupon’s get slammed with business at negative profit margins and are left to produce the goods when Groupon holders strut through the door to claim their booty.
And for those of you unfamiliar with how the money flows when a Groupon is issued it flows like this -
- Business offers huge discount on product or service
- Groupon pushes it out to the public through their daily deal site and mobile app
- Consumers buy up the Groupon (many times far beyond the business’s ability to honor the Groupons)
- Groupon takes 50% of the revenue generated
- Business gets what left
Now what you have to remember is that the business already discounted its product or service by 70% to 90% before Groupon takes its cut, which is half – so the business winds up with 5% to 15% of what they normally charge. If Groupon sold a couple hundred or thousand deals then the business owner gets a nice pop of cash in the door. Hence the hard-money lending aspect of Groupon. The only problem is that now the business is on the hook to honor all those heavily discounted Groupons – the redemption of which put severe cash flow strains on the vast majority of businesses as the deep discounts are redeemed.
Here’s a piece from SlopeOfHope that says everything you need to know about Groupon…
Only half a year ago, Groupon was the talk of the town. It was the biggest, hottest IPO on the horizon,and it was the darling of the social media industry. Imitators were everywhere, but there was one giant that was far ahead of everyone else: Groupon.
Well, one glance at a stock chart will show you just how much the biggest, hottest IPO has been embraced since it went public. I offer you the following: