[yuvadam]

It would have been advertising if it had a longlasting effect.

Consider that once you do a groupon for a 20% < discount, it is going to be very hard to get that customer again for the full price of the product. So what do you get from the supposed advertisement? A single customer that may or may not give you his business again.

That's not advertising. That's what's crassly known as 'opening your legs'.

[AznHisoka]

That's exactly what advertising is. You're paying for exposure and a chance that you can convert him to a lifetime customer. You can say the exact same thing about Adwords, and display advertising. You pay for each click that may or may not give you a single sale, let alone a lifetime customer. You pay for an impression that may not influence a customer's buying decision in the future...

Groupon may be a bad form of advertising for most businesses.. but it's still advertising.

[yuvadam]

You are absolutely correct. But Groupon doesn't give that impression. The impression you get from a Groupon is "I got this really good deal for $10, why would I want to return for $20?"

In a classic ad the full price is stated upfront. You convert your customers on that, not on a completely unsustainable one-time deal.

[AznHisoka]

Yep, you are right. It dilutes your brand. It's a reason why most luxury brands like Prada and Louis Vuitton stay away from flash sites like Gilt and RueLaLa as well. It's also why Apple rarely has sales on iPods or iPhones.

By giving out discounts, you're training people to expect deals forever, and that's unsustainable.