The Fall of Groupon

August 20, 2011 6:22 AM

The fall of Groupon: Groupon must spend to grow, but must continue growing to cover its operational expenditures.

"As of June 30, Groupon had $680 million in current liabilities -- bills the company has to pay," Business Insider's Henry Blodget pointed out earlier this week. "Meanwhile, Groupon only had $376 million of current assets with which to pay them."
posted by Gordafarin (90 comments total)

Didn't we go through a Death Of Groupon thing about six months ago?

Ah yes, they got nearly a Billion dollars of VC funding back in January to help them through the last round of this panic.

I'm still trying to figure out where all their money goes.
posted by hippybear at 6:27 AM on August 20, 2011

So, you can get an IPO for a Ponzi scheme now?
posted by localroger at 6:28 AM on August 20, 2011 [17 favorites]

That's interesting. I live in a small city in Michigan, and Groupon came to us a few months ago. Here, it seems like there's not a lot of places that are good fits for Groupon, and they've kind of worked through the more obvious local-favorite restaurants already. I'm starting to get offers in my in-box for restaurants in small towns over an hour away, or for tourist attractions on the other side of the state. That had already had me wondering how sustainable it is in a market like this one--I used a number of Groupons when they first came to town, but now there might be one a month that is of interest, if that. It seems like where I live we don't have the market depth to keep in going long-term--not a wide enough variety of non-chain restaurants, for instance.
posted by not that girl at 6:28 AM on August 20, 2011

If i wasn't unemployed I'd be laughing so hard now at people who had invested into this scheme. But I am. Thank god for foodstamps.
posted by gideonswann at 6:36 AM on August 20, 2011 [3 favorites]

The original Business Insider article that the Atlantic piece relies on is probably a better link (be sure to get to the part about how much Groupon has paid out to its executives):

Groupon is able to generate cash while losing money because it collects cash from Groupons the moment it sells them and doesn't have to pay some of the cash to merchants until 60 days later. When the company is growing rapidly, it generates a lot more cash from new Groupon sales than it has to pay out to redeem old Groupons. Right now, Groupon is growing so quickly that this "float" creates positive cash flow even though the company is losing money. The trouble is that the cash Groupon generates from the Groupon sales is not all Groupon's to keep...

It is also worth noting that, in the history of the company, Groupon has raised a total of $1.1 billion of cash--and paid out $942 million of that cash to its early investors and executives (highly unusual for such a young company). If Groupon does get into cash trouble, therefore, it will not be because the company didn't discover an amazing new business opportunity or raise all the capital it needed. It will be because of, well, greed.
posted by mediareport at 6:42 AM on August 20, 2011 [27 favorites]

I'm glad I'm not the only one who thinks this kind of looks like a pyramid scheme.
The next logical step is for them to make their salespeople independents who troll the lands in search for vulnerable businesses so they can establish franchises.
posted by tmt at 6:46 AM on August 20, 2011

Groupon S-1
posted by humanfont at 6:48 AM on August 20, 2011 [3 favorites]

I imagine that Groupon's offices look like Jean-Ralphio's media conglomerate.
posted by Threeway Handshake at 6:51 AM on August 20, 2011 [23 favorites]

I'm glad I'm not the only one who thinks this kind of looks like a pyramid scheme.

In fairness, it's a new and interesting way of combining a pyramid scheme with a ponzi scheme. But, um, yeah.
posted by mhoye at 6:53 AM on August 20, 2011 [3 favorites]

That's actually the central unresolved problem of capitalism. Groupon is not really an exception.
posted by Miko at 6:53 AM on August 20, 2011 [17 favorites]

this "float" creates positive cash flow even though the company is losing money.

And I'm pretty sure it was this exact scheme that became responsible for the .com bust. Amazon operated this way for ages before it turned its first profit; companies that couldn't make the jump to that just tanked.
posted by Miko at 6:54 AM on August 20, 2011

Here's more on Groupon's investors cashing out early ($810M on $946M, with a list). It seems unusual.
posted by Nelson at 6:55 AM on August 20, 2011 [2 favorites]

So, does this mean I should use my Groupons as soon as possible?
posted by apricot at 6:56 AM on August 20, 2011 [3 favorites]

Is this just déclassé? It seems it must be an illegal breach if fiduciary duty of some kind?
posted by ~ at 7:00 AM on August 20, 2011

There is a sucker born every minute.
posted by bukvich at 7:02 AM on August 20, 2011

I looked into Groupon a while back (as a retail business), and it's a complete money-looser for the business user; in effect, you're giving money to Groupon to give away your product. You get a bunch of NEW, ONE-TIME customers for the free swag, but what you really need/want/must have is RETURNING customers to keep your business running. For us, it worked much better to maintain a mailing list and send offers to our existing customers.
I've read of cases where small business were run out of business because of Groupon, since the customers were now trained to get free product, either because of the one time the business used Groupon, or even worse, when the competitor across town did.
posted by Old'n'Busted at 7:07 AM on August 20, 2011 [7 favorites]

http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/

Eric Lefkovsky, founder and CEO, has done this several times before, each time raiding the VC dollars to profit himself and his family, each time leaving behind a paper bag of a company with no cash.
posted by fatbird at 7:08 AM on August 20, 2011 [5 favorites]

A huge portion of Groupon's last funding round went towards cashing out prior investors, including the founders and executives. I don't think this is necessarily a bad sign per se, but Groupon has seemed shady to me since I first heard about it, so it certainly doesn't instill confidence when I see key staff cashing out[1] prior to profitability, or even positive cash flow.

[1] This happens pretty frequently in later rounds, but I can't say that I've ever seen it happen to this degree. Usually we're talking about founders taking a couple hundred grand off the table, not millions.
posted by feloniousmonk at 7:10 AM on August 20, 2011

I used to think Groupon was a great deal, and on the surface it often is, but the stories of the ways it's not such a good deal for the owners of the businesses it promotes have kind of turned me off to it... plus the fact that Groupon, like other sorts of sales tools (many types of coupons, the various types of BOGO offers, etc.) relies a lot on convincing you to spend money you wouldn't otherwise have spent because hey this is such a great deal can't let this go by was leading me to spend more than was good for me, and I just didn't want to be facing that discipline test repeatedly when I stood to gain so little from it. Not all the deals are like that, but many were.
posted by Kosh at 7:21 AM on August 20, 2011 [1 favorite]

It seems like where I live we don't have the market depth to keep in going long-term--not a wide enough variety of non-chain restaurants, for instance.

Hell, I live in Chicago - Groupon ground zero - and Groupon hasn't offered much here since last year. More and more offers are for locations in the suburbs. More and more or the waning local offers are for hair removal/pedicures/massages. The days of Groupons for interesting local restaurants or stores seem to be past.
posted by Windigo at 7:25 AM on August 20, 2011 [1 favorite]

the fact that Groupon, like other sorts of sales tools (many types of coupons, the various types of BOGO offers, etc.) relies a lot on convincing you to spend money you wouldn't otherwise have spent because hey this is such a great deal can't let this go by

Getting you to spend money you otherwise wouldn't have spent is the basis of most marketing, period. If it's money you would have otherwise spent, then it's going toward kitchen supplies, housing, or utilities.
posted by hippybear at 7:25 AM on August 20, 2011

I've got a bit of money from the "free code!" days with them but they haven't come out with any deals that interest me in the longest time.
posted by cashman at 7:29 AM on August 20, 2011

Hi, I just found out what Groupon was for. Up till now I thought it was some sort of over-the-internet collaboration service for coders.
posted by dunkadunc at 7:33 AM on August 20, 2011

Groupon is so obviously a really bad idea for businesses that I've chosen to not participate, for their own good. I just can't see any long-term positive outcome, should I help them shoot themselves in the foot. It has ripple effects throughout the community. Much the same reason I don't set foot in Walmart.
posted by five fresh fish at 7:35 AM on August 20, 2011 [3 favorites]

It's interesting to look up reviews of places that Groupon (& other daily deal sites) promote.

This from a spa featured on Living Social in London this morning (& previously featured on Groupon):

"Worst experience of my life. Really unprofessional massage therapists who were talking and laughing to each other during the 1 hour massage. Also seemed to have no experience, as the head massage consisted of pulling strands of hair and poke and prodding my scalp. They also didn't get any of my muscles during my body massage. Dumped about 2 bottles of oil on my scalp and my body - so left the place dripping. Therapists also smelt like BO. Will never go back, and would not recommed this place to anyone - not even my worst enemy. Should never have bought it on Groupon!"

Groupon's brand is not well respected.
posted by DanCall at 7:36 AM on August 20, 2011

I just don't understand how anyone can operate on the new post-Dotcom era business philosophies. They all seem to be obsessed with "burn rate," how slowly you can spend your VC investment. But they don't seem to be earning ANY money. Or there's the other idea, we lose $5 on every widget we sell, but we'll make it up in volume.

I used to have this argument about business philosophies with the owners of the businesses I worked for back in the rah rah eighties. We'd be making 20% margin on sales and maybe a 5% profit every month. The extra cash was reinvested into inventory, and sales grew every month. The owners were focused on growth, not profitability. I told them, what's going to happen if sales level off? You'll instantly become unprofitable. I argued that they needed to balance growth with profitability. But no, they spent it all on expansion. I remember one company that expanded and bought a branch office from a competing franchisee. The branch was marginally profitable, they insisted they could pump it up and get it expanding. I warned them not to do it. But they proceeded. So we remodeled the store and bought new inventory and reopened with a higher sales capacity than ever. This store was focused on GAO sales since it was next door to a major military base. But then suddenly, without warning, the base was closed. Sales died overnight, and the the whole group was suddenly unprofitable. They became overleveraged and an obvious acquisition target, and within a couple of months was purchased by a larger corporation with better cash reserves. Oops.
posted by charlie don't surf at 7:38 AM on August 20, 2011 [3 favorites]

Smash and grab capitalism. I hope they go down in flames.
posted by TheRedArmy at 7:39 AM on August 20, 2011 [3 favorites]

Is this the one where we all have to share the same giant crouton over the internet? 'Cause even I could see that was a bad idea and I'm still long on Urban Fetch.
posted by Divine_Wino at 7:42 AM on August 20, 2011 [6 favorites]

Groupon is not so much a website as a parasite.
posted by Sys Rq at 7:43 AM on August 20, 2011 [4 favorites]

The closest Groupon location is a three hour drive from me, so I've totally missed this phenomenon. Actually, I haven't missed it. But it is certainly missed me. I'm figuring it is even odds whether it collapses under its own weight before the wildfire sales model can spread up here.
posted by meinvt at 7:44 AM on August 20, 2011

Eat your $18.95 putt-putt package.
posted by Horselover Phattie at 7:52 AM on August 20, 2011

this "float" creates positive cash flow even though the company is losing money

Ya know what else floats?
posted by ShutterBun at 7:53 AM on August 20, 2011

Hitler? Whipped cream? Canoes that aren't upside down? I have no idea.
posted by nebulawindphone at 7:57 AM on August 20, 2011 [6 favorites]

I think this business could only have emerged during a severe recession when enough businesses were desperate enough to try it. It doesn't bode well for Groupon in the long term even if they do avoid blowing it first.
posted by snofoam at 7:58 AM on August 20, 2011

So should I invest in Groupon as a hedge against a second recession?
posted by mazola at 8:00 AM on August 20, 2011

Ya know what else floats?

Churches? Lead? Very small rocks?
posted by hippybear at 8:01 AM on August 20, 2011 [17 favorites]

All of these complaints are pretty much a year ago.

Groupon and their clones, and their clients, have figured out that Groupons are great for situations with high variable margins and high ticket prices relative to coupon size. You make money the first time out with these offerings -- any full-price repeat business is pure cake.

The easiest understanding of this is for businesses where fixed costs are very high relative to variable costs. It costs you virtually nothing to add a sixth person to a yoga class normally attended by five people -- so getting paid $15 rather than $30 for the class is $15 of pure profit.

Also, consider a restauranteur with an average ticket of $60 per cover who offers a "$30 of food and wine for $15." He knows that the Groupon buyer tends to be cheaper (say, orders $50) but will tend to bring in someone along and some Groupons will go unredeemed. He gets $100 in revenue for the tickets, minus $22.50 for the Groupon discount and commission, but plus $2.50 in revenue for unredeemed Groupons -- making $80. If food and beverage costs and incremental labor is 50% (of the original $100) he is still making $30 in gross profit he never would have seen. His servers are getting $15 in tips they never would have seen.
posted by MattD at 8:01 AM on August 20, 2011 [7 favorites]

I interviewed at Groupon in April. They decided to go "another direction". That direction was apparently straight down.
posted by IvoShandor at 8:03 AM on August 20, 2011 [2 favorites]

Ya know what else floats?

i'm pretty sure he means ducks, you guys.
posted by elizardbits at 8:04 AM on August 20, 2011 [4 favorites]

I imagine that Groupon's offices look like Jean-Ralphio's media conglomerate

I rather imagine it looks like the office of that internet animation company that bought Bart Simpsons Angry Dad cartoon. Especially when they said "while you're waiting, help yourself to some stocks" which dispensed like a roll of toilet paper
posted by Redhush at 8:05 AM on August 20, 2011 [2 favorites]

Groupon article saying the same things months ago.
posted by cjorgensen at 8:08 AM on August 20, 2011

Ya know what else floats?

Hope?
posted by mazola at 8:09 AM on August 20, 2011 [3 favorites]

Should have taken the mad money Google was offering them. Isn't that the business model of a lot of these semi-scammy startups? What wre they thinking? Were they holding out for more, or worse, did they believe their own hype? Either way, it's gonna go down as a missed opportunity for the ages.

And what's that say about the business jugdement at Google? Seems they like to overpay for trash. Maybe they have too nuch money, and not enough ideas.
posted by VikingSword at 8:14 AM on August 20, 2011 [2 favorites]

Even if I had the balls to come up with such an obvious scam as Groupon, my conscience wouldn't let me do it. It's no wonder I'm broke.

True story, though. I've used a few Groupon deals, but haven't used Groupon. Every time I've seen a deal I wanted to use, I contacted the business and said if they extended me the same deal as the coupon, I would patronize their business and they could pocket the whole thing. It has worked 100% of the time, and it makes me feel good.
posted by Benny Andajetz at 8:15 AM on August 20, 2011 [86 favorites]

Also, consider a restauranteur with an average ticket of $60 per cover who offers a "$30 of food and wine for $15." He knows that the Groupon buyer tends to be cheaper (say, orders $50) but will tend to bring in someone along and some Groupons will go unredeemed. He gets $100 in revenue for the tickets, minus $22.50 for the Groupon discount and commission, but plus $2.50 in revenue for unredeemed Groupons -- making $80. If food and beverage costs and incremental labor is 50% (of the original $100) he is still making $30 in gross profit he never would have seen. His servers are getting $15 in tips they never would have seen.
posted by MattD

Why does this logic sound so familiar? Ah, it is the same logic car dealers used when trying to convince you that leasing is better than owning. "Ya see you take the money you would normally use as a down payment and you invest it...over the course of the lease it makes you money!"
posted by Gungho at 8:15 AM on August 20, 2011 [1 favorite]

I joined Groupon about a month ago and I have not seen one single offer of interest. Golfing in Lake Geneva? Really? I suppose there's a very small number of people who are thinking "wow, I'd really like to go golfing but it's so expensive... hey, there's a half-off coupon an hour away from where I live. I'll go buy some clubs!"
posted by desjardins at 8:16 AM on August 20, 2011 [1 favorite]

You mean Groupon offers more than those horrific fish pedicures? Well I'll be damned...

I've nothing against the fish or the pedicures - it's the horror stories I've read about the life expectance of the poor fish involved.
posted by sodium lights the horizon at 8:17 AM on August 20, 2011 [1 favorite]

Groupon needs to issue a new Groupon---for Groupon itself!

Spend $20 to get $40 Groupon credit so you can then buy $20 worth of dog food for $10 and $10 worth of Skittles for $5.

Metasuccess!
posted by TheRedArmy at 8:19 AM on August 20, 2011 [12 favorites]

Huh. They recently redesigned to make the corners more rounded and the site harder to use. IPO magic, I guess.
posted by klangklangston at 8:27 AM on August 20, 2011 [1 favorite]

but plus $2.50 in revenue for unredeemed Groupons

My understanding is that, unless you negotiate otherwise, Groupon keeps 100% of unredeemed coupons. Outside the US, it's not even negotiable.
posted by Benny Andajetz at 8:28 AM on August 20, 2011

FEATURED DEAL

Spend $20 to get $40 in Groupon Class A Common Stock!

The Groupon Guide to: Going Public

IPOs: The fundamentals of this classic game remain largely unchanged: pull a lever to activate a scrolling panoply of numbers and fruit. If you happen to stop on a winning combination, the machine will belch treasure into your bucket.

How to Win: If you know how to read a balance sheet, try investing in literally any other company. You will most likely win this game.

posted by mazola at 8:33 AM on August 20, 2011 [2 favorites]

A while back when Geithner was first appointed, there was some talk of regulating Venture Capital more closely, under the theory it might be the next bubble.

I scoffed pretty harshly at this, figuring this class of investment and investors was the last thing that needed extra oversight and any problems would probably take care of themselves.

A lot of what I've read about Groupon has me rethinking this position.
posted by weston at 8:43 AM on August 20, 2011

Groupon needs to issue a new Groupon---for Groupon itself!

i work for a groupon competitor. they did just exactly that two or three weeks ago.
posted by lester at 9:02 AM on August 20, 2011 [4 favorites]

And what's that say about the business jugdement at Google? Seems they like to overpay for trash. Maybe they have too nuch money, and not enough ideas.

They offered 6 billion. GroupOn thinks it is worth $25 billion. I think Google got the valuation just right.
posted by Ironmouth at 9:03 AM on August 20, 2011

...combining a pyramid scheme with a ponzi scheme
I note in passing that pyramonzi dot com and ponzimyd dot com seem to be available for the ambitious
posted by hexatron at 9:13 AM on August 20, 2011 [3 favorites]

I note in passing that pyramonzi dot com and ponzimyd dot com seem to be available for the ambitious

Or maybe Pud will have a resurgence.
posted by ryoshu at 9:16 AM on August 20, 2011 [2 favorites]

There's enough info out there now that businesses have no real excuse not to realize what they are getting into if they choose to promote with Groupon. I like Groupon, personally. As a consumer and a person that likes to try new things, but also as someone who loves to save a little bit on the things I already enjoy. Groupon has worked for me in both ways.

There are many ways to promote a business. Groupon might not be the right one, intentwise or budgetwise. But for someone like me, who has become a repeat customer at some of the places I've tried, and felt better about getting other things that I wouldn't have necessarily bought at the regular price (like the dessert class I will be taking soon), it is a pretty nifty resource.


And yes, Groupon does hang on to the value of unused offers. However, they will refund you your purchase price if you neglect to use one. The customer doesn't lose.
posted by cmgonzalez at 9:18 AM on August 20, 2011

horrific fish pedicures

what
posted by elizardbits at 9:29 AM on August 20, 2011 [3 favorites]

Fish pedicures

(i really wish i hadn't google image searched this. aaaargh.)
posted by bewilderbeast at 9:33 AM on August 20, 2011 [2 favorites]

Fish pedicures arrive in UK - practical fishkeeping May 2010

A year later, there's a temporary stand doing it in my local shopping centre.
posted by sodium lights the horizon at 9:40 AM on August 20, 2011

Finally, an answer to what the hell the Dr. Fish stall on Miyajima was all about. I had studiously avoided looking on my own, knowing that it would eventually show up on my door step. Thanks, Metafilter!
posted by GenjiandProust at 9:48 AM on August 20, 2011

This thread is the second place that I've recently seen Groupon referred to as a "Ponzi scheme". This got me curious, so I looked into it (I was not previously familiar with Groupon beyond its mere name itself). But I still don't understand how it is a "Ponzi scheme". Could someone please explain it to me?

If I'm understanding it correctly, there's a discount offer which will not be redeemable unless a sufficient number of people buy it. Is that correct? If so, how is that a Ponzi scheme?

A Ponzi scheme is where earlier investors are paid more or less directly out of the investments of later investors. But in Groupon, if I'm understanding it correctly:

(1) If anyone is screwed, it's the early investors;

(2) Potentially no one is screwed ever;

(3) You seem to be able to purchase the discount offer even after the fact that it is redeemable has been made public, so you can completely avoid ever being screwed if you so desire;

(4) The early "investors" know (or at least can and should know) that they can potentially lose their "investment".

Am I misunderstanding something here? "Ponzi scheme" does not mean "business with a nonstandard and potentially stupid business plan".
posted by Flunkie at 10:07 AM on August 20, 2011 [1 favorite]

Groupon is able to generate cash while losing money because it collects cash from Groupons the moment it sells them and doesn't have to pay some of the cash to merchants until 60 days later. When the company is growing rapidly, it generates a lot more cash from new Groupon sales than it has to pay out to redeem old Groupons. Right now, Groupon is growing so quickly that this "float" creates positive cash flow even though the company is losing money.

Compared to...

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.

posted by kithrater at 10:14 AM on August 20, 2011

Making money on the float doesn't make something a "Ponzi scheme" either.
posted by Flunkie at 10:15 AM on August 20, 2011 [2 favorites]

I've used a few Groupon deals, but haven't used Groupon. Every time I've seen a deal I wanted to use, I contacted the business and said if they extended me the same deal as the coupon, I would patronize their business and they could pocket the whole thing. It has worked 100% of the time, and it makes me feel good.

This. Usually by the time I've gotten to the business in question, they've been flooded with ornery one-time cheapskates and they're stressing their business a bit to grab 50% of hardly anything two months from now. Offer them the same deal in sweet cash in-hand, NOW, with no Groupon split and they jump. Or offer less. Especially if the deal is still pending and you mention how you can still go buy the Groupon. They have to choose whether to turn down your 80% or wait around for 50% in 60 days. I'll miss Groupon.
posted by umberto at 10:36 AM on August 20, 2011 [2 favorites]

Technically, a Ponzi scheme needs to be selling a financial product. Groupon isn't selling financial products, so they're not running a Ponzi scheme. However, their business models is reminiscent of a Ponzi scheme in that Groupon relies on paying debts-due-now with cash that is already spoken for in the future, and being able to repeat that trick because business is growing. If business fails to grow at a sufficient pace, they'll be unable to pay their debts-due-now at some future point and go bankrupt.

It's got nothing to do with the consumer side of things, but rather Groupon's relationship with merchants: at some point in the future, present-merchants won't get their money from Groupon because the money earned from their vouchers was used to pay past-merchants.
posted by kithrater at 10:39 AM on August 20, 2011 [2 favorites]

There is a sucker born every minute.

When the groupon for an Authentic P.T. Barnum Exhibit comes along, you'll know it's time to get out.
posted by mhoye at 10:40 AM on August 20, 2011

However, their business models is reminiscent of a Ponzi scheme in that Groupon relies on paying debts-due-now with cash that is already spoken for in the future, and being able to repeat that trick because business is growing. If business fails to grow at a sufficient pace, they'll be unable to pay their debts-due-now at some future point and go bankrupt.

Apparently Groupon is relying on cash that it has now to line the pockets of its founders and early investors at way too early in the game, and is taking a devil-take-the-hindmost attitude toward any future debts it may have coming due.

If they hadn't cashed out nearly $1billion and had churned that back into the business, they'd have 3x more cash on hand now than they'd need to meet that shortfall.
posted by hippybear at 10:42 AM on August 20, 2011

I mean, really, they should have been using that 60-day holding period to earn interest or something as cream on top of their share-taking (rent-seeking?) profit from the sales, and not doing a pay-it-backward scheme.

That's obvious to me, and I completely do not have a financial brain.
posted by hippybear at 10:44 AM on August 20, 2011 [2 favorites]

Benny -- the "standard" Groupon deal for US retailers is (as far as I understand) 50% of the gross coupons sold, and retailers retain that split on non-redeemed coupons.

Groupon gets a bit of float, but Groupon also pays the credit card charges out of its end, which is actually favorable to the retailer. (2 mos. of float is worth a fraction of 1%, whereas a retailer would pay 3% or 4% credit card processing charges).

I'd have to think with LivingSocial competing ever harder, OpenTable pressing hard on the restaurant business, and Google starting in on the business, that the splits and other terms are going to get more favorable for retailers, not less.

If Groupon and LivingSocial were smart, they'd be broadening out the use of their sales forces to create more robust service sets for local retail -- working both down-channel (other forms of advertising, promotion and retail connection with customers) and up-channel (using themselves as a sales-force-for-hire for people wholesaling things other than promotional services).
posted by MattD at 10:46 AM on August 20, 2011

I looked into Groupon a while back (as a retail business), and it's a complete money-looser for the business user; in effect, you're giving money to Groupon to give away your product.

ISTM that's a good way to think of Groupon: like setting up a free-samples booth. The vast majority of people will just say "hey, free stuff", grab some, and forget who you are, but hopefully some fraction will become repeat customers. Presumably this is of benefit to businesses in very specific situations, like businesses that have just opened or just added a new product, but not to established businesses.
posted by hattifattener at 10:48 AM on August 20, 2011

Actually, I've also heard that Groupon is a good way to draw in business if you're in the kind of business where you have staff who would just be sitting idle otherwise, and not a lot of expenditure on each deal which gets purchased.

A (not ideal, but good) example would be a whitewater river rafting company. If you typically have a huge drop in customers after Labor Day, put out a Groupon which is only good after Labor Day, drive in a bunch of business. You're not really consuming much (the rafts and such don't get used up like food does in a restaurant), and you're filling idle hours with income, albeit at a reduced rate, but it's cream compared to past years when you had very little business in that time.

As long as your Groupon is enough to cover wages, fuel, and taxes, you'll be coming out at least even, and the "free samples" may net some repeat business.

There are a myriad of businesses where this model works. Restaurants aren't one of them.
posted by hippybear at 10:52 AM on August 20, 2011

A while back when Geithner was first appointed, there was some talk of regulating Venture Capital more closely, under the theory it might be the next bubble.

Those are all familiar words, but I can't parse a lick of sense out of them.
posted by yerfatma at 11:04 AM on August 20, 2011

Those are all familiar words, but I can't parse a lick of sense out of them.

Mea culpa, they're quite vague, here's an earlier thread where this was discussed:

Is Silicon Valley A Systemic Risk?
posted by weston at 11:18 AM on August 20, 2011

They ALL float.
posted by Aquaman at 11:21 AM on August 20, 2011 [2 favorites]

If you read the S-1 carefully, you'll also see mention of the fact that some businesses use Groupon like a revolving short-term loan. Typically the business would collect revenue over the course of a longer period of time (say, one year), but Groupon allows the business the collect the future revenue (admittedly at a high cost) almost immediately.

A couple of other notes for people who don't want to read the S-1 and both amendments in detail:

1. Groupon currently pays out the share for unredeemed vouchers in the US, but keeps it in most of the International markets. Jim Moran from Yipit has done some research into the average nuber or unredeemed vouchers (aka 'breakage'), and it seems to be in the 20% range. So at least in the US, the merchant actually gets an extra 10% over whatever the voucher price is set as in payouts.

2. I can't remember the exact number right now, but the average number of times a merchant runs a deal with Groupon is quite a bit above 1. In other words, a significant number of merchants run a second (or third, etc.) time with Groupon. While that is not proof that the model works for the merchants, it certainly seems to indicate that enough businesses feel they do get value out of running a deal (otherwise, why run another deal?). Furthermore, if you look across the industry as a whole, a lot of merchants run deals with various deal providers back to back.

3. Somone asked where all the money with Groupon goes. Aside from the already mentioned disbursement of funds back to the original investors (which is actually not that uncommon when raising multiple rounds, but that doesn't make it any less morally questionable to me) the vast majority of the cash on hand goes into marketing. Currently Groupon spends somewhere around $2MM+ a day on marketing. Most of this is customer acquisition cost through SEM and display advertising. While everyone is fixated on the fact that Groupon spends ridiculous amounts of money, and hence is theoretically at risk of running out of cash, there was a single sentence in the original S-1, which basically indicated that the ARPU (average revenue per user) they gained in Q1 from the newly acquired subscribers from last Q4 was higher that the CPA (cost per acquisition) by a factor big enough to make them profitable acquisitions, which would indicate that at least the newly acquired subscribers are a net positive. This seems to be the core argument internally for Groupon for spending such huge amounts on marketing to gain scale.

Of course, none of this means Groupon is a good investment, or that they will survive as a business. But it seems the jury is still out on whether this is a sustainable industry.
posted by CaffeineFree at 12:25 PM on August 20, 2011 [1 favorite]

There's two totally different ways people are saying Groupon has analogies to a Ponzi scheme.

One criticism is about investment in Groupon's stock. At every new financing round, some large portion of that financing cash in was spent paying off the earlier investors. Some amount of cash out for insiders is common these days, but Groupon investors have taken an unusually large amount of cash out early. If the Groupon business is healthy there's no problem; those later investors will own more of the company and make lots of money. But if the business fails, it looks very ugly.

The other criticism is about coupon float. Groupon's business relies heavily on the way they collect money up front from consumers and then wait 60 days to pay businesses. That could be no problem (a lot of businesses rely on float), but some people who've dug deep into the financials say Groupon has a problem. It doesn't help that the initial S-1 really obfuscated the cash flow.

One thing to keep in mind: Groupon is in the quiet period. They cannot respond publically or privately to any of the criticisms being written about them. In theory their financial filings should speak for themselves. The problem is that some analysts don't like what they're saying.
posted by Nelson at 12:40 PM on August 20, 2011

I have used Groupon 4x, and I only had a great experience once.
One Groupon was for Chiropractor visit, horrible experience. The Doc kept trying to get me to commit for a treatment regiment that would have cost over $3000. One Groupon I had to let expire, but that was my fault, it was a basketball game. It is possible this company will survive, but stay alway from their future stock, unless you are going to short it. IMHO
posted by roastermarv at 12:57 PM on August 20, 2011

In related news:

Is Groupon a Financial Train Wreck Waiting to Happen?
"As the daily deal site prepares an eagerly awaited IPO, pressure is mounting for it to prove it's not another dot-com flameout like Pets.com"

Tech Bubble? Not Anymore
"Venture capitalists thought they would soon be cashing in as a new crop of tech stocks went public. Now it’s time for plan B."

IPO View: Market Rout Exposes High-Flying Dotcom Deals
"As broad economic worries pound the markets, a growing number of IPOs are being delayed or pulled. Tech IPOs, whose multibillion valuations recall the heady days of the dotcom boom of the late 90s and early 2000s, might fall the furthest."

Hey Tech Startups: Winter Is Coming
"Last week, as the stock market plunged and swung, the same tremors spread through the tech industry's startup community. The question popped up in blogs, tweets, and happy-hour chatter: Is 2011 about to turn into 2008?"

posted by ericb at 1:05 PM on August 20, 2011

Rob Wheeler | HBR: Groupon Doomed by Too Much of a Good Thing.
posted by ericb at 1:13 PM on August 20, 2011

Some amount of cash out for insiders is common these days, but Groupon investors have taken an unusually large amount of cash out early.

Sorry, There's Just No Good Excuse For The Amount Of Insider Selling Going On At Groupon.
posted by ericb at 1:23 PM on August 20, 2011

Can I buy a Groupon with some Flooz?

In reality, Groupon may indeed be a train wreck waiting to happen. But the business model has struck a chord with a lot of other advertising businesses, such as newspapers or radio. As a result, there's a ton of copycats out there. (I think I saw somewhere that there are around 400 Groupon clones, and that number is rising.) Our paper is getting ready to start something similar. The paper in Phoenix sells "Deal Chicken," which is spreading to other markets. One of the local broadcast conglomerates has one as well. For these media outlets, the Groupon-type deal is something they can sell alongside their other products. It's not their only income. It's also a type of advertising they can sell in many cases without the advertiser giving any money up front. Deals that sell well can mean a lot of revenue in a short amount of time.

A business I frequent used Groupon recently. They got nearly a thousand takers on the deal. They have been open since last October and rely on social media and word of mouth for advertising. He said that Groupon brought him a ton of first time customers, and that he knew many of them were one-time deal users, but that it was his way of getting people to know where he was and to get them to try the place. He also mentioned it was going to cost him a fair bit, but that he ran the numbers and it was a good risk. (I have to say that his product, gelato, is by far the best I have ever had, and judging by the oohs and ahhs when people sample the flavors, I'm not alone. It's truly a product that sells itself once people try it. It's also affordable to do on a regular basis. So he has some factors that work in his favor that can help a Groupon be worth it.) He doesn't think it's worth it for a lot of businesses, however.
posted by azpenguin at 1:59 PM on August 20, 2011 [1 favorite]

there was a single sentence in the original S-1, which basically indicated that the ARPU (average revenue per user) they gained in Q1 from the newly acquired subscribers from last Q4 was higher that the CPA (cost per acquisition) by a factor big enough to make them profitable acquisitions, which would indicate that at least the newly acquired subscribers are a net positive. This seems to be the core argument internally for Groupon for spending such huge amounts on marketing to gain scale.

There's an interesting analysis here, using Boston as a case study, which suggests why this might be problematic. Boston's only one town, of course, but Groupon's so new in a lot of its operation areas there's not a ton of places to compare with. (Chicago's equally old, but that's the HQ and so might be expected to have some advantages).

The basic problem he identifies in the Boston numbers is something I think you're seeing anecdotally in this thread --- revenue per customer is declining among established customers. People sign up, try a few deals, then get bored and use the site only sporadically as time goes on. Groupon is still signing up tons of new customers, which means it's still bringing in more money for the moment. But their customer acquisition costs are going up. Where they hit the wall is when they begin to run out of customers to acquire. Maybe they're an amazon in the making and that point is decades away, but if there appeal is in fact limited to a younger urban demographic, then probably they're not that far off from reaching the point where pretty much everyone in a given town who might want to check out groupon has checked it out. And then they're fucked. They'll have a million people on their list, 990,000 will delete the email as bacon each day, and deals will go unfilled.
posted by Diablevert at 2:56 PM on August 20, 2011

I was an early adopter for Groupon and its ilk. All good but then expiring coupons made me anxious and I missed cashing in on a couple. I think I probably broke at least even overall but the pressure is wearing. I'm easing out and expect others may too.
posted by Morrigan at 3:41 PM on August 20, 2011

Groupon defines the difference between a true business and someone's idea to make a lot of money quickly. There is a distinction.

Groupon has built itself up through hype, short-termism and venture capital. This ensures that the early insiders get rich and get out quick while the later adopters get stuck with the tab. Sound familiar? It's the same story that we read about time and again during the dot com bubble.

There are very, very few businesses that grow exponentially in their early years, have longevity, long termism in mind and keep their founders around for a decent amount of time. Anyone who knows business or has worked in a small business knows that Groupon has always been a gimmick that may provide a one-time boost, but which is good for bottom feeders and that's about it.

I know of several local small businesses who have tried Groupon and will never do it again because of the pain it caused. Building a business takes time, extraordinary amounts of personal sacrifice, effort, integrity and did I mention time? If you want to get rich quick you better be an insider at the start of a Groupon like project...otherwise, for the other 99.9999% of us.....
posted by tgrundke at 7:35 PM on August 20, 2011

0. I do not like or predict success for Groupon. However...

1. Expiered Groupons can still be used, you just don't get the discount. You can still get $20 worth of stuff for your $20 Groupon, just not the $40 you planned to get with it. It's the law in many states.

2. Current liabilities are payable in the future, not necessarily right now. Current assets are what you have in the bank, not your future revenue.

3. Henry Blodget is a terrible writer and Business Insider is a terrible tabloid. Nobody should read it; even when it's right, it's wrong.
posted by anigbrowl at 8:25 PM on August 20, 2011 [2 favorites]

All this daily deal stuff feels like Herbalife to me. You get into a territory first you'll be ok for a while but then everyone else floods in.
posted by awfurby at 2:13 AM on August 21, 2011

It was obvious this would never work. Businesses can just make these offers directly. They don't need to pay Groupon for the privalage, and the business model is easily cloned (see Living Social, which advertises on TV all the time)
posted by delmoi at 1:38 AM on August 25, 2011

Groupon CEO vigorously defends his company in an internal email that may well have been written to leak.
posted by Nelson at 8:17 AM on August 28, 2011

"SEC may force a postponement of the offering. The problem arises from an e-mail apparently sent last week by Groupon’s chief executive"
posted by Nelson at 4:26 PM on September 3, 2011