Groupon – from rags to riches to rags again?

14 Jun

A few days ago, I decided that to spoil a friend and me with a massage. Searching the web for some nice and cheap places, I suddenly remembered that someone told me about this site Groupon. Groupon is a site, that offers discounts on e.g. massages, haircuts, etc.
And really, entering the website I found a deal, that offered two massages for the price of one. Wow!
Thinking more about it, I wondered how is this possible?Why would companies participate?What about Groupons earnings?
Questions over questions, so where to start?

First of all, I wanted to know who and what is the basic idea behind Groupon. Where does it come from? After using my number one gadget for blog-posts (guess what it is?) I found a post on Groupon, that was not even worth skimming trough. Just as I was about to close the window, I saw this other link to an article in “The Guardian” called “Groupon – The golden nugget”. And I tell you, this was a loooong article. The gist of the article is though quickly summarized : “There’s nothing new in bulk buying and negotiating discounts. But Groupon does it in 47 countries for more than 70 million people. It’s an idea so simple anyone could have thought of it. Unfortunately, Andrew Mason got there first… And now he’s sitting on a company worth $30bn.” In the article, Andrew Mason is also described as a “left-leaning musician who played piano in a rock band and had, as he recalls, an allergic reaction to the idea of making money”. A guy like you and me.
Not bad, huh? It sounds like the perfect from rags to riches story, or as we say in german “Vom Tellerwäscher zum Millionär”. But unfortunately, we are not in a Hollywood movie that always closes with a happy-ending. As my search went on, I found some articles that analysed the credibility and future of Groupon. Egghat (one of our fellow bloggers on the web), wrote a post called “Groupon:Finger Weg!” (translated: Groupon-Keep your fingers off it!). What a bummer! Reading the article, I suddenly understood his radical headline. Groupon is history-repeating, meaning that business insiders are forecasting Groupon a future that reminds them of the dot-com bubble at the beginning of the 21 century. Back then, the bubble beggared many people because of wrong speculations. But why are the speculations going into this direction, though the predictions actually sounded positive?
Groupon, who is right now about to enter the stock-market, just published their IPO (initial public offering) which led to many discussions on the web.
Referring to Gobry from the “Business Insider”  there is a huge red flag in the IPO called “Dividends on preferred stock” and “Redemption on preferred stock.” or in the bigger picture information asymmetries and agency problems.
Groupon paid out dividends to its preferred stockholders ,in every year for which there are numbers in the filing, which is actually normal but “while founders taking some money off the table has become relatively common, and generally for good reasons, Groupon has been extreme. Groupon has paid out $930 million to employees and investors; astoundingly, out of the $130 million it raised in its penultimate round, $120 millionwent to the founders’ pockets.”

Ouch,that does not sound too good. Furthermore Groupon suffers of one other big problem, that is their relation to the service providers using Groupon as a platform to advertise and allure customers. At first, the idea of attracting customers by offering discounts and therefore luring them into their store/restaurant/bar etc. sounds very logical and smart. Dieter Petereit explains on his blog that a service provider has to offer a 50 % discount for the customers on Groupon. The other 50 % have to divided between Groupon and the provider, so that there is actually a discount of 75 %. Does that sound profitable for a company?
Another thing is, that Groupon is giving out as many coupons as possible, ergo it may happen that a small shop gets confronted with 6000 or more sold coupons.
Finally, I found an article in “Die Zeit” on individual cases and experiences with Groupon that also showed how unprofitable it can be for a service provider to use Groupon (please read the case of Frau Punke).
What do you think?Would you still use Groupon after these facts and experiences or not?

6 Responses to “Groupon – from rags to riches to rags again?”

  1. garciana June 15, 2011 at 8:42 am #

    Hi Kiki!

    Funny, I have come across Groupon, formerly called City Deal, myself during some work I was doing last year but it seemed to be booming at the time so I was surprised to read about their possible future downfall.
    I followed your advice and just read the case of Frau Punke. Selling out such a high number of coupons can put especially small firms or family businesses into high difficulties of fulfilling the increased demand. The problems that result from this may be tremendous.
    I congratulate you on the way you developped your thoughts, starting off by creating a personal link to yourself and then asking questions and reflecting on the articles you have read on the subject. I particularly like the comparison you make to the “dot-com bubble” which, in my opinion, is a comprehensive way to put it. Nice and interesting post! I’m looking forward to reading more.

    • PhilBart June 15, 2011 at 11:31 am #

      hey kiki,
      good job on that one. I always wondered how Groupon actually works and how it could become this big. You explained it in a very nice and comprehensive way, as Anna already pointed out by mentioning the great dot-com-bubble example. I also like how you put these really intelligent questions on your way through the post. The linking Groupon’s IPO you really succeed in making the post appear very professional after starting of with a personal story, which is just excellent! Awesome heading as well! Love it!

  2. fannysia June 15, 2011 at 11:03 am #

    Hi Kristina, thank you for the informative read! 🙂 i really enjoyed your post because it has offered such a different perspective to ‘Group-on’ i have ever read! it was very intriguing for it makes me look beyond the success it seemed to portray! Great links shared and they are all very relevant and adds on to your arguments and opinions. 🙂

    i was really interested in this topic, and i found this post which is a first hand related experience of an enterprise using Groupon to publicise and gain recognition and soon finds it to be a terrible mistake for they’re losing more than they are gaining.

    Thank you for the great read for it really really provided me with an alternative view. I feel I have learnt much from your post. Thank you 🙂 Keep writing!

  3. Dian Stefanov June 15, 2011 at 11:44 am #

    Hi Kristina,

    It was really nice to get some more “inside”information about Groupon. Before I read your post I thought that Groupon can be a really easy way to for companies to increase their profit, because through this website more clients can reach them. But how it turns out to be I was actually not aware of what the real story is, so thank you for enlightening me.

    Taking into account the fact you stated in your post I am not planning of ever using Groupon.

    Nice Job!

  4. natiliab June 16, 2011 at 11:08 am #

    Hi Kiki,
    you have raised some interesting questions that I never came across before. I use Groupon myself because I think the deals are amazing and worth to buy. But seeing it from the business’ perspective the whole deal does not seem to be as profitable anymore. Your information about how Groupon actually works helps to understand the whole business idea. Nevertheless, I think that small firms might not participate if they would not get any profit from it. I think that the advertising they receive might be worth offering discounts. I think that especially small companies who have just one or two stores (for example a haircutter) might be better known because the person who has bought a Groupon and received a good treatment might tell her friends.

    On youtube I have found a video that discusses whether Groupon is good or bad for businesses:

  5. moonjungkoo July 4, 2011 at 5:23 pm #

    Hi Kristina, your well thought out post attracts me so much as I just used a Groupon for dinner. I went to a Chinese restaurant, Royal Garden. They offer Mongolisches Buffet for dinner. Its original price for two persons are 31 euro, but I used a Groupon and just paid 14 euro, which was less than 50% of the price.

    So, I was also thinking how they could make a profit for selling tickets for less than the half price. But, we paid extra 10 euro for drinks as they are not included in the price. And the restaurant is located in Osdorfer Strße, which is far from the centre of Berlin, it took me about an hour to get there. The dinner was really great and my friend and I decided to bring more friends next time. In this sense, I think, for a newly opened restaurant, situated far away from the city, Groupon is a really good way to advertise their restaurant!

    On the other hand, if it is not a one-time event, it will, as Anna commented, put small businesses on the risk in terms of balancing out their financial accounts. -I did not know Groupon takes 25% of a normal price, it is a truly high fee for advertisement-

    Regardless of such drawbacks, I think Groupon flourishes thesedays, as Google offers 5.3 billions to aquire Groupon, then it would be Googlepon (?) soon ^-^

    For more information, check out this link below:

    In order to be a sensible customer, I think it is really good to know how things work when we purchase some goods and services, so thank you Kristina!


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