[jamestnz]

I agree, it's probably a terrible deal for almost every retailer, especially small businesses.

As I recall, the standard deal with Groupon etc is 50% off retail price, then Groupon (or whoever) takes 50% of what's left.

So consider a product or service you usually sell for $100, which costs you $40 to deliver. When doing one of these deals, you're now selling it for $50. You get $25 of that, and the platform operator keeps the other $25. So your cost of sales was $40 and your revenues were $25.

Fine if you're happy to operate a loss-leader to attract quality clients who will return to you at full price later.

Unfortunately it seems that these daily-deal services often attract low-quality leads to your business. The kind of customer who exhibits no loyalty, and simply surfs from company to company taking advantage of these loss-leader deals, then never returning.

[CPLX]

You've just described the main dynamics involved, with one key part left out.

The vendor would realize the revenue up front, when all the "coupons" would be sold. Then they would fulfill the orders over a period of weeks or months, with some sort of breakage rate involved. Needless to say that put the incentives of the buyers and sellers in tension.

But overall the main model was not really just a simple loss-leader approach, it had a lot in common with loan sharking.

[davemel37]

I'm not sure this is true.

"Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days."

-http://www.wsj.com/articles/SB100014240529702043580045770279...

[pbhjpbhj]

That article is paywalled.

Certainly in the past we were "offered" the opportunity to do a 75% off deal. Then IIRC it was 60-40 in their favour. They got all the breakage (payees that didn't turn up) and we had ty wait until the end of the deal period to apply for the money.

It was as close to a con as you could get. Like selling pensioners ludicrously expensive fascia boards and guttering when what they needed was their gutters cleaning.

Groupon knew the business it was good for but seemingly marketed to those with little financial nous. They promised winning repeat custom on the one side and cheap one-off deals to the end-customer on the other.

IMO some version of this could have been good for businesses in my sector but it would require the company not to be greedy. Investors don't go for those companies.

[CPLX]

Interesting. My memory of the subject is pretty out of date by now, as I don't follow Groupon much, but I'm certain that's how it worked during its hypergrowth period.

Indeed, it appears that we're both correct, assuming you're not in the US. Interesting article from 2012 sheds some light:

Some context about how the company operates: Groupon has had two very different payment structures. In what I call the American model, merchants receive cash upfront for a deal. Once the deal is closed, Groupon tallies up how much it owes the merchant and sends them the money in installments, with the vast majority of the money delivered within 60 days. If a Groupon isn’t redeemed, the merchant gets to keep the money. (Known in the industry as “breakage.”)

Outside the U.S. and Canada, Groupon has used a different scheme. For simplicity, I will call that the European model. In this scheme, Groupon only pays merchants when a Groupon is redeemed; merchants do not get cash up front. If a Groupon isn’t redeemed, Groupon gets to keep the money. Breakage is considered to be 20-25% of Groupon purchases, so this amount is significant.

There are exceptions to the above. I know of one popular merchant in Europe that negotiated to get the American model. But this is largely how it works.

http://venturebeat.com/2012/08/15/the-giant-red-flag-that-an...

[pbhjpbhj]

Yes, UK here and I didn't follow the later progress as after being propositioned (early in the Groupon era) as a mark by them I pretty soon decided it was far from being good for the business I was in at the time.

Good follow up, thanks.

I wonder why they took those differing approaches - regulatory pressure?

[jamestnz]

Good point, thanks for the clarification.

[icebraining]

It can still make sense if you have low marginal vs fixed costs. I know restaurants that are happy to use them to fill up time slots when they're usually empty¹. Since most of their costs are fixed (rent, salaries, etc), they still make a profit at the margin.

¹ I don't know about Groupon, but other deal sites allow them to put certain conditions on the use of the voucher

[wutbrodo]

This is particularly true for businesses that offer things like yoga classes, for whom the marginal cost is ~0. This is obvious to everyone now, but early on most small businesses didn't think of Groupon as what it is: a form of marketing that requires a fairly particular cost structure to be cost-effective.

[davemel37]

I did an analysis of the best deals in the early days of Groupon, and they were all classes that were better when attended with friends. (I think the best selling one in the early days was a cupcake baking class.)

[pbhjpbhj]

One problem early on was Groupon wouldn't allow the limitation of numbers of "deals" sold. That put some people out of business. The people running Groupon were acting well beyond the bounds of morality. IIRC they did correct that after some bad press.

The money lag also killed some small businesses who had assumed they'd get money at the pos to cover their costs and hadn't accounted for increased custom needing greater spending on inputs when money was locked up for 3 months. Cashflow interrupts easily kill a small (micro) business.

[fullshark]

Seems to maybe work well for things like yoga classes also. If the class isn't full then that's unused space that you can give to an interested consumer for basically free with a daily deal (and hope they become future subscribers). But that's about it.

[x0x0]

But group yoga is zero marginal cost for unused slots in a class. There's not many other businesses like that.