Groupon: the product... is people!

Today was pick-on-groupon day, and somewhere a PR person is sweating bullets. None of the news has been good news regarding Groupon. The honeymoon is so over.

The Guardian interview with Andrew Mason starts out good paints Groupon as 'fun', in the dot com era kind of way of "fun".

The walls are plastered with handmade posters and Photoshopped images perpetuating elaborate inside-jokes. There is still a detectible sense of the entire operation as an ironic satire on the idea of running a multinational company, as if nobody can quite take the idea seriously.
The firm's customer service department consists largely of actors and standup comedians from Chicago's flourishing improv scene: "I walk past sometimes and hear them singing to customers," says Julie Mossler, Groupon's communications manager. They have reason to be happy: Groupon in the US has an "open vacation policy", meaning that employees can take as much holiday as they wish provided their work targets are met.

(as an aside, the whole 'open vacation policy' sounds great, especially for the company when that pesky book keeping of time owed is done away with. Companies save on avoiding vacation payouts either yearly, or when an employee leaves the company. Sucks when people don't take vacation at all though, which is the reality.)

But then the naysayers unleash en masse.
Techcrunch: Why Groupon Is Poised For Collapse

Businesses are being sold incredibly expensive advertising campaigns that are disguised as “no risk” ways to acquire new customers. In reality, there’s a lot of risk. With a newspaper ad, the maximum you can lose is the amount you paid for the ad. With Groupon, your potential losses can increase with every Groupon customer who walks through the door and put the existence of your business at risk.
Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business. The $21,000 that the business in this example gets for running a Groupon is essentially a very, very expensive loan. They get the cash up front, but pay for it with deep discounts over time.

Another Techcrunch: Why I Want Google Offers And The Entire Daily Deals Business To Die

Some of the advice is just awful. On Google Offers’ “Best Practices for the big day” page for businesses it says:

No photos, please! Er - actually, lots and lots of photos and blog posts and more! Expect there to be a social aspect to your Offer of the Day and be ready to boost your own social media efforts to help promote your offer even beyond Google's efforts.

In other words, tell your existing customers about Google Offers so that we can acquire your customers, you can reprice your base and lose margin and we get a cut of it!

Live to Eat explains why they aren't selling their beef on Groupon, and in reading it you'll get a crash course in gross margins impact on businesses.

CASE 2:
The Healthy Butcher offers a coupon of $50 for $100 worth of goods. Of the $50, we keep $25. The cost of the goods is $65 based on a Gross Margin of 35%. If 10,000 vouchers are purchased, and the redemption rate is 75%, then we have on our hands a marketing expense of $237,500 to deal with. What a difference a change in Gross Margin makes! And this case was only for a 50% off coupon; imagine the cost involved with doing a $75 for $400 deal. Or imagine a slightly higher redemption rate, the cost increase for this marketing campaign is huge. Further, keep in mind that the cost calculated above is only for the raw cost of goods sold, and does not take into consideration the increased cost of labour and other expenses required to sell a significant amount of additional product. There is no chance we could continue to pay our farmers and continue business - insolvency would quickly follow.

Poises bakery and café learned this the hard way.

After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising. Sure, maybe thinking of it as just marketing may seem justified, but anyone that knows me well knows that I would never pay more than $100 for advertising, much less $8,000, because I don’t believe that regular advertising had much return on investment at all.

Perhaps this isn't so new after all. Many have compared the idea to Letsbuyit.com, which failed spectacularly in the last dot-com boom. Now Forbes points out the idea itself isn't the only thing that reminds of the past.
Deja Vu: Groupon’s Bubble 1.0 Approach To Accounting

I’ve just started diving into the Groupon S-1 filing, which among other things demonstrates truly stunning growth for the daily deals company. But what immediately caught my eye was Groupon’s declaration that it measures its business using a variety of strictly non-GAAP measures. Losses? Who cares about losses?
Wow, how Bubble 1.0 of them.

Even The New York Times are questioning Groupons accounting practices

It is easy to see why Groupon wants prospective shareholders to view its accounts this way. Strip out marketing expenses, acquisition-related costs, stock compensation, interest expense and payments to the tax man and, presto, the start-up earned $60.6 million. If investors accepted this fantastical form of accounting, all sorts of companies would be worth billions more, too.

Considering the marketing expenses mentioned above are very much part of how groupon operates, with the ten billion pop-unders telling me there's a nail-salon deal in my city right now while I'm shopping online, and countless little facebook ads showing me all the local spa's want to wax my legs, I don't see how you can strip that out. This expensive will always be there.

Groupon employs 400 writers and editors in Chicago alone, basically everyone who was laid off from advertising or is trying to make it as a stand-up comic, to compose advertising copy, and legions of customer service reps. But coupons never built brands, despite how Coke used them way back when.

Groupon Is a Straight-Up Ponzi Scheme

Meanwhile, many early-adopting merchants find that the burst in customers immediately disappears, and since they can’t perpetually discount 75%, those merchants stop using Groupon. But Groupon’s sales force adds many more new merchants than it loses (for now). And Groupon goes out and raises another round at an even higher valuation; they hire even more salespeople and expand into even more virgin territory. Lather, rinse, repeat.
The model is only sustainable if it pays off for local merchants - and to justify Groupon’s current size, it now must pay off for local merchants ubiquitously and flamboyantly. If not, Groupon is mostly a Ponzi scheme.

Shall we dust off the Chimp? He will dance on Groupons grave for 50% off.