The Groupon Hustle

Groupon is bad for the American economy.

Like really, really bad. For lots of reasons.

Lately Groupon has been the belle of the ball. Last year the company increased its annual revenue an astounding 2241%. I wish there were uppercase numbers so I could type that figure in all caps.

Because it’s important to understand how the big G pulls in all this cash, I’m going to summarize here how Groupon works; if the progressive coupon racket is old hat to you, feel free to skip ahead to the next paragraph. Essentially, Groupon sells coupons for local businesses' products at stupendously deep discounts (40-50% off is commonplace). The rub--and there's always a rub--is that a certain number of people have to purchase the coupon before it becomes valid. So if there's some deal that really interests you, it behooves you to tell all your friends and get them to buy in as well. There is no limit to the number of coupons available. Good deals on popular services in metropolitan areas routinely move thousands of vouchers. Groupon takes a cut of every voucher's sale price, usually around 50%.

On the surface, and this of course is the way Groupon frames it, this setup is good for the participating businesses. Groupon has a ginourmous audience, and customers who weren't previously aware of your product will be made aware of it. Groupon is essentially a marketing and promotions engine. But all this comes at a huge cost; not only to the participating businesses, but to the larger economy in general.

First and foremost, it’s very hard for businesses to absorb the deep discounts Groupon demands. Businesses often operate at a loss on the products they discount and 50% is a HUGE margin. These businesses are just hoping against hope to create some new trickles of revenue.

Next, you have to face the fad factor. Groupon is the hot-shit thing in marketing right now. There is a great deal of peer pressure to be on the service. If you aren’t and your competitors are, what does that say about you to your customers? Honestly, no one is sure. It probably doesn’t say much of anything at all, but very few companies are willing to take that risk.

Lastly you have the devaluation problem. When you give your customer a product at 50% off, they come to expect to pay that much for it. When they return to see your normal, non-Grouponed price points, they might feel the products aren’t worth that much. It’s nearly impossible to change a consumer's mind once they’ve decided a product's worth. Groupon devalues the products it promotes, and that’s about the most damaging thing you can do to a brand.

The funny thing is, despite all the money Groupon’s taking it at the expense of local businesses, it’s not a very fiscally solvent company. See, for every dollar that Groupon makes, they spent $1.45 to get there. Apparently, having an army of salespeople cold-calling every business in the world takes a lot of up-front investment. Recently they raised nearly a billion dollars in venture capital, but almost that entire amount was sunk into repaying earlier investors.

I’m not going to say Groupon is a sinking ship (the rats are still swarming the decks). Nor is it the wrong move for every business using it, but it is overvalued in our cultural mindspace, and at some point in the near future the other shoe is going to drop, and it’s going to be a hell of a thing when it does.