The Groupon of Doom

Published on Tuesday, September 21, 2010, by James Norton / Edit Post

If you're a regular diner, you probably already know about Groupon or one of its many similar competitors. Much beloved by bargain hunters, Groupon deals give steep discounts (typically 50 percent) on gift certificates to restaurants and other businesses.

For customers, the advantage is clear: A $100 gift certificate to a chic eatery for $50 is a no-brainer. For restaurants, the logic is more tortured. A flood of new customers—some great, some penny-pinching, some nontipping cheapskates—coming through the door. At best, restaurants struggle to break even on the deal in purely financial terms, but it can be a seriously money-losing prospect, particularly since Groupon has no interest in limiting the number of coupons sold. (Quite the opposite, in fact.)

The owner of a restaurant called Posies Cafe in Portland, Oregon, has penned what may be a watershed blog post about the dark side of Groupon. The business owner writes:

"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."

The challenge comes in the sheer volume of the things that can sell: If you're running a small business, a commitment to honor 1,500 half-off Groupons can spell financial doom.

Does this make Groupon an evil company? Well, no, although local restaurateurs often curse it with real fury. Businesspeople are in business to make money and should be able to calculate the risk and return before signing on (it often makes more sense for service companies, which lose time rather than product to Groupon customers). That said, the temptation to break out to a whole new clientele has to be irresistible.

There are, of course, other ways to go about it. A neighborhood pizzeria, known for its quality of ingredients and serious gelato, hosts church dinners and often just prints up $500 worth of $20 gift cards and has employees and friends hand them out to people who haven't been to the restaurant recently or ever. The risk is limited, and the return—happy new customers coming in with small but tangible amounts of free money in their hands—seems to be pretty good.

Image source: Flickr member iwona_kellie under Creative Commons
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POST A COMMENT |15 Comments

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  • An interesting read about Groupon and the whole daily deal Ponzi scheme:

    http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

  • i can say firsthand, from working at a business that sold a groupon, that groupon is predatory. they lied about the terms of the groupon. they were supposed to expire, and instead we have to honor them for 5 years!! they lure you with the whole" well 20% of people never use them so you get a big chunck of money!" well they reimburse you AS you use the groupons....and.....people are mad after the...+READ

    i can say firsthand, from working at a business that sold a groupon, that groupon is predatory. they lied about the terms of the groupon. they were supposed to expire, and instead we have to honor them for 5 years!! they lure you with the whole" well 20% of people never use them so you get a big chunck of money!" well they reimburse you AS you use the groupons....and.....people are mad after the expiration date (when they had plenty of time to use their massive deal) and request their money back so groupon doesn't get a bad rap with buyers. most of the people who come in never come back, they just wait for a groupon of a similar service from another business. its terrible. i feel so bad for all the small business owners who get hooked by this terrible situation.-COLLAPSE

  • I think it depends on the company and how the coupon works. I use Restaurants.com a lot, and with their coupons it's, lets say, it costs about $10 for a certificate getting $25 off your meal, but you have to spend at least $50 for it to work in the first place, and a nice tip percentage is applied automatically. This way you do save some money even though it isn't always a massive amount, but the...+READ

    I think it depends on the company and how the coupon works. I use Restaurants.com a lot, and with their coupons it's, lets say, it costs about $10 for a certificate getting $25 off your meal, but you have to spend at least $50 for it to work in the first place, and a nice tip percentage is applied automatically. This way you do save some money even though it isn't always a massive amount, but the restaurant still seems to be able to make sure you spent enough for it to be worth it for them.

    I think, anyway.-COLLAPSE

  • Junco- That is not correct. Even in the Posie's blog, she acknowledges that she set the price with her groupon rep. Other commenters, and the groupon CEO have stated that restaurants can set a cap on the number of groupons.

    Sorry, I'm with the people who say that Posies planned poorly.

  • Captain, you don't seem to understand how Groupon works. Groupon sets the number of coupons, and the price, and makes their profit based on how many you sell. Therefore Groupon is incentiveized to lower the price (to sell more) and to sell as many as possible--thereby screwing the vendors.

  • I don't see the big deal. The restaurant should have figured out what it would cost them before signing up. They should also see if this expense would be the same if they spent it on advertising instead.

  • Another negative, coming from a server:
    Customer walks in, orders $100 worth, pays $50, tips on $50, instead of the TOTAL AMOUNT.
    Hey, thanks.

  • I use halfpricedepot.com, which avoids the worst of the groupon problems by offering a set amount of each deal. After they sell 200 (or whatever) of certificates for restaurant X, they are out of that until the restaurant replenishes the supply. I'm not sure how the supplier side works but some deals are refreshed every few days, some seem like they happen once a month or so and some just go away...+READ

    I use halfpricedepot.com, which avoids the worst of the groupon problems by offering a set amount of each deal. After they sell 200 (or whatever) of certificates for restaurant X, they are out of that until the restaurant replenishes the supply. I'm not sure how the supplier side works but some deals are refreshed every few days, some seem like they happen once a month or so and some just go away and aren't heard from again.-COLLAPSE

  • Laura, for restaurants it's a situation of "It sounded like a good idea at the time". At the restaurant where I work, it's pretty easy to hit $90 to $100 on a table for two. We did a $50 for $25 Groupon, and almost everyone who brought in the Groupon spent as close to $50 as they could. We did a second one for a lower amount ($30 for $15) so that people wouldn't worry as much about spending...+READ

    Laura, for restaurants it's a situation of "It sounded like a good idea at the time". At the restaurant where I work, it's pretty easy to hit $90 to $100 on a table for two. We did a $50 for $25 Groupon, and almost everyone who brought in the Groupon spent as close to $50 as they could. We did a second one for a lower amount ($30 for $15) so that people wouldn't worry as much about spending exactly the coupon amount, and people still spent exactly the amount. A good number of them were also angry that they couldn't use the Groupon on our happy hour specials. Never mind that the Groupon said that it was only good in the dining room and happy hour is in the lounge, never mind that happy hour is already a screaming deal, they wanted more, more, MORE.-COLLAPSE

  • TheJayBird: I work for a store that used Groupon and (as far as I've heard) will never ever do it again. Ours was for a certain dollar amount for free, and I can tell you we did not get even 50% of what the coupon-buyer paid, and most customers clung as closely as possible to the dollar amount. Even with the extra customers the Groupon brought, we lost money with the deal.

    Somewhat unrelated...+READ

    TheJayBird: I work for a store that used Groupon and (as far as I've heard) will never ever do it again. Ours was for a certain dollar amount for free, and I can tell you we did not get even 50% of what the coupon-buyer paid, and most customers clung as closely as possible to the dollar amount. Even with the extra customers the Groupon brought, we lost money with the deal.

    Somewhat unrelated but still interesting: Groupon also sent out an email to all of its users who had our coupon to remind them of the (fast-) approaching expiration date - and didn't inform us that they would be doing so. Therefore, we were staffed for a usual, slow weekday night and got a MASSIVE crowd. We therefore had very inferior service even though our staff is very good; there weren't even enough of us to handle basic stations. If they had the courtesy to tell us they would be sending out reminders in the middle of the week, we could have staffed a few more people and helped the evening to run smoothly.-COLLAPSE

  • While I cannot comment on Groupon, I can comment on another of my (evil) Favorite sites, Restaurant.com. I LOVE this site...because I am a consumer. It is a no-brainer!!! I have however on 4 different occasions over the last 3 months been to a restaurant that has told me that they will no longer accept the certificates after ___date because they have withdrawn their name from the site months...+READ

    While I cannot comment on Groupon, I can comment on another of my (evil) Favorite sites, Restaurant.com. I LOVE this site...because I am a consumer. It is a no-brainer!!! I have however on 4 different occasions over the last 3 months been to a restaurant that has told me that they will no longer accept the certificates after ___date because they have withdrawn their name from the site months earlier, yet the restaurant still shows up on the site. I can understand their frustration...they get NO money from the certs, and people can buy as many as they like...it's like free money to us, but Restaurants cannot keep giving away food to the same people over and over...-COLLAPSE

  • Seriously, this is what passes for logic these days? Sheesh. Hundreds, hell, thousands of us have probably used Groupons, and you know what? Restaurants keep setting them up. It's called the free-market system. If Groupon sucks, it'll fail because people will quit using it. Nobody holds a gun to a restaurant-owner's head and forces them to sign up for a Groupon.

  • James Norton's poorly crafted article fails to recognize any of the truths of coupon marketing. The reason that most restaurants fail is that most restaurant owners are poorly prepared to run any business, let alone a restaurant. It reminds me of alcoholics that open up bars and pubs only to find the same high degree of failure.

    Aas someone who has been in advertsing and marketing for over 3...+READ

    James Norton's poorly crafted article fails to recognize any of the truths of coupon marketing. The reason that most restaurants fail is that most restaurant owners are poorly prepared to run any business, let alone a restaurant. It reminds me of alcoholics that open up bars and pubs only to find the same high degree of failure.

    Aas someone who has been in advertsing and marketing for over 3 decades and directly worked with invcentive and coupon marketing, I am stunned that anyone would asert that those who use coupons would be any more penny pinching or non tipping than the general populace.

    Given the cost of client aquisition, this restaurant owner should have been more than able to accomodate this 50% off clientelle and still pull in a profit. I suspect that the Groupon participation was perhaps a last ditch effort to save an already sinking ship.

    In the words of Gordon Rasmsey, I have two words for the owner of Posies Cafe and the writer of this article "Wakey wakey!"-COLLAPSE

  • The Posies owner insists in her blog post that Groupon refuses to cap the number of deals sold.

    Either she is mistaken or lying. I know that I have seen some Groupon deals sold out, and in the SF Gate article posted above by Thewinchester, a Groupon executive claims that "it has always been Groupon policy to allow merchants to cap deals."

    If Posies refused to set a cap (wanting to rake in...+READ

    The Posies owner insists in her blog post that Groupon refuses to cap the number of deals sold.

    Either she is mistaken or lying. I know that I have seen some Groupon deals sold out, and in the SF Gate article posted above by Thewinchester, a Groupon executive claims that "it has always been Groupon policy to allow merchants to cap deals."

    If Posies refused to set a cap (wanting to rake in all the upfront cash they could), or if they did not understand that they could set the cap, I think they can only blame themselves for their losses.-COLLAPSE

  • @James Norton: I've heard about this story before it was posted by Chow, and to say this article is a little one-sided, and bordering on biased is an understatement.

    I think you need to look at the comments from Groupon CEO Andrew Mason, reported by the San Francisco Chronicle (http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/09/17/businessinsider-groupon-ceo-posies-2010-9.DTL), reported on...+READ

    @James Norton: I've heard about this story before it was posted by Chow, and to say this article is a little one-sided, and bordering on biased is an understatement.

    I think you need to look at the comments from Groupon CEO Andrew Mason, reported by the San Francisco Chronicle (http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/09/17/businessinsider-groupon-ceo-posies-2010-9.DTL), reported on CNBC, and also posted to their corporate blog (http://groublogpon.com/cities/too-much-of-a-good-thing/). They read in part;

    "it has always been Groupon policy to allow merchants to cap deals."

    Now if, as it appears from the reporting, Posies Cafe didn't do their research before offering the Groupon, understand the system, and put to market an offer which was going to fit within the business' target goals, planning, needs, financial capacity and ultimate return for new customer generation.

    All business owners have to act responsibly when planning and running marketing campaigns. If, as it appears, Posies did not - then they have nobody to blame but themselves for the effect of a poorly thought out and badly executed campaign on their business.-COLLAPSE