Merchants are not happy...Are the buyers?


A Groupon happens between a Merchant and Buyers. - No Merchant! No Groupon!

1. Merchants Loose?
75% off existing Selling Price didn`t make sense, but inflating the price does. Caveat Emptor!

2. Buyers Loose?
Multi State Class Action Lawsuits accuse Groupon of selling gift certificates with short expiration dates.

3. Investors Loose?
If Groupon comes apart before the IPO, is it worth doing an IPO?

Thursday, March 10, 2011

Groupon makes more sense for selling services. Not products!

The Groupon business model is a win-win only for Groupon. The seller or the merchant is forced to subsidize his own groupon. Groupon claims they are providing an advertising program. If this is an advertising play, why do they manage the process, collect the money and then pay it out. There is a huge difference between providing free coupons that discount the price at the time of a purchase versus buying a short-term groupon coupon.

Groupon pre-sells coupons and is not a true coupon play. It requires a set number of buyers to agree to buy coupons that have a very short expiration date for one special offer. From the adverse comments from the merchants, it appears the groupons are painful for the merchants and they typically want the groupon to end as quickly as possible to reduce the loses from their groupon. The merchant's have come to learn from Groupon that they are also responsible for collecting the taxes based on the original amount, which further reduces the payment a merchant receives from Groupon. Groupon manages the payments and pays the merchant over a period of 90 days after the groupon to cover any issues that might come about. Groupon has many state class action lawsuits over the expiration dates of the coupons brought on by many disgruntled buyers.
Groupons for Product Sellers vs Services Sellers
If the Seller is selling Services then groupon makes a little more sense then a Seller selling a Product. A seller of products has an upfront fixed cost being the cost of product and cost of money to pay for which is paid to a third party. Groupon does not appear to appreciate this cost as they ask for 50% of that cost.
Let’s do the numbers. If the Retail Price is $100.00, the Groupon Price is $50 and the merchant should receive less than 25%, can’t forget the taxes.  The seller will receive about $18.00; State taxes will get about $7.00 and Groupon $25 for staging the event. So for every $100 item sold for $50 to groupon buyers, the seller gets $18.00 and Groupon $25.00 for sending out e-mails and advertising on the Internet.
If a merchant were to do a 50% Off sale, the merchant would collect the money immediately, collect 50% and control the number of units to be sold, offer other sales promotions and pay the sale advertising cost 30 days later. From a business perspective this makes a lot more sense then doing a groupon.
Now, if the seller is selling services and there are no true upfront costs to deal with, this makes it easier to play with the numbers and make it work to have a breakeven groupon. The cost and resale of services are usually calculated based on labor, expertise and materials if required. Service costs are more flexible as the service provider can adjust the amount of time he allocates to get the job done. The Product Sellers are now doing the same, as they have to inflate the product price to make a groupon work.

If this is true, then where is the buyer benefit of buying a Groupon?

If we use the same calculations as above, one can see why it makes more sense to do a groupon for services then products. So when you see a services groupon for $25,000 worth of IT Consulting B2B services, the buyer now has to ask what is missing if the price is reduced from $25,000 to $12,500. Nothing is for free - Caveat Emptor (Buyer Beware?)
Groupon’s business model is creating a new kind of buyer – the 50% Off Groupon Whore. This buyer will never have loyalty to any merchant, just to 50% Off Groupons. What merchant wants or needs this kind of buyer as part of their clientèle or business model. A business has to make money to stay in business and it is not possible for this to happen if they are required to sell everything at 50% Off groupon style. The merchants are already reacting and inflating the prices to ensure there is enough profit in a groupon to remain in business. If this were the next step, why would a buyer buy a groupon? It doesn't make any sense. The merchant inflates the price to be discounted so Groupon can sell the groupons on-line and make a profit. Sounds like a Ponzi scheme to me.

Unfortunately this is what the groupon business model is forcing businesses to do today. Groupon is definitely the leader in the world of groupons and are making the bulk of the revenues. They will do an IPO before the end of 2011. The investors have paid for their early stock and are just waiting so they can cash out. Then the groupon business model will crash and morph into another social buying business model that is more of a true Win-Win for the buyer, the merchant and the advertiser.

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