Is Groupon upsetting the Buyers?

Class action filed against Groupon alleging unlawful expiration dates

The following post is a copy from the Blog of the Legal Times, an affiliate of the Daily Business Review. http://www.dailybusinessreview.com/PubArticleDBR.jsp?id=1202485550272&Class_action_filed_against_Groupon_alleging_unlawful_expiration_dates

A class action was filed yesterday in U.S. District Court for the District of Columbia accusing Groupon Inc. of placing unlawful expiration dates on its gift certificates.
The Web site, which has headquarters in Chicago and an office in Palo Alto, Calif., works with businesses in cities across the United States and around the world to offer consumers discounted rates on goods and services, from restaurant meals and flowers to hot air balloon rides. The company sells these “Daily Deals” online.

The class – represented by Charles LaDuca of Washington’s Cuneo Gilbert & LaDuca – alleges Groupon violates federal laws governing electronic sales by placing expiration dates of less than five years on these “Daily Deals,” which the suit classifies as gift certificates. In a phone interview, LaDuca noted that similar class actions are pending in Illinois, Minnesota, California and Florida federal courts.

“There are a lot of angry consumers across America on this issue,” he said.

The suit also alleges that Groupon “preys on unsuspecting consumers” by requiring users to agree to “boilerplate” terms and conditions that include a class action wavier. LaDuca said that in addition to claims for damages, the class is seeking a court order requiring Groupon to change its practices.
Groupon, through a spokeswoman, declined to comment, citing the pending litigation. The company did not have an attorney listed for the Washington suit as of this morning, nor did it have representation listed yet for most of the class actions filed this year in other states.

The suit was filed on behalf of a Washington man who claims he bought a $20 Groupon for a one-month gym membership worth $305, only to have it expire before he could redeem it two months later. The complaint quotes anonymous Web-based comments from other Groupon users expressing frustration with the expiration dates.

This story was first published in the Blog of the Legal Times, an affiliate of the Daily Business Review.

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.

Which is most Effective for the Merchant? A Groupon or a 40% OFF Sale!

Let’s do a comparison between a groupon and a 40% OFF Sales Ad posted in the local newspaper.

If a merchant does the math before committing, the merchant will see that using the 40% OFF Sales will achieve the goal and not loose thousands as he will do if he does a groupon.

The merchant places a $600 Ad in his local newspaper, which he then will pay in 30 days after the money is collected. The sale Ad is for a simple 40% discount off of one product to get customers in the door and will have other in-store specials not published. To ensure the event is a profitable sale and attract and retain new customers.

Doing the Ad program, the merchant is in control of his business and decides what he wants to make and how much he wants to spend. The merchant decides to do a break even ROI to get new customers into the store and sell them other products on sale. A typical reason for doing Ads. The Merchant only wants to sell up to 20 units. He will collect the money at the time of the sale. The cost to the merchant is $150 per unit with a typical retail price of $300 as advertised in the store. The Merchant’s revenue after the sale is $180 per unit netting a $30 profit per unit or a total of $600 for 20 units. This is enough to pay for the Ad and that brought in at least 20 customers and additional shoppers. By doing the calculations, the merchant is able to measure the success of the 40% loss leader sales including the additional earned revenues from the sale and the number of new customers.

If we do the calculations for Groupon we see a different mindset. Groupon is dictating how the program will work. The merchant has lost control as Groupon sets the rules of the sale and the merchant accepts or is out. Groupon collects the money from the buyers and pays the merchant over a 90-day period after the unit is picked up. Groupon sets the number of coupons to justify doing the groupon and signs up the buyers. For this example, Groupon wants 200 customers. Coupons sold and the Buyers show up at the merchant’s store to redeem their coupons and leave. They don’t buy from the merchant as they have already paid and are waiting for the next 50% off deal. A Groupon buyer’s mentality is not to pay full price. Only 50% off! This is the new Mindset created by Groupon. Everything should be sold at 50% off or don’t buy it.

The Groupon calculations are simple. The groupon price is reduced from $300 to $150 so they can attract the buyers. The merchant receives 50% but he has to collect the state sales tax based on the $300 as stated per the Groupon contract. So, the merchant’s 50% profit is now closer to 40% as state sales taxes can range from 9 - 10% depending on the state.

The groupon deal example is for $150 and 200 coupon purchasers. Groupon’s profit from the coupon sale is 50% of (200 x $150) = $30,000 which is split between the merchant and Groupon which equal $15,000. The merchant’s profit is further reduced as the merchant has to collect the sales tax. This could be about 10% less as he pays the sales tax to the state. So the merchant receives only $14,000.

Merchant Looses $16,000 --------- Groupon makes $15,000. --------- The math doesn’t lie.

Groupon is so hyped in the news on the Internet and has become so fashionable and alluring that the merchants are not using their good business sense and not doing the math before committing to do a Groupon. It is time for “Merchant Caveat Emptor”!

Merchants that have done a groupon were interviewed and admitted they didn’t understand the full impact of a groupon on their business before they committed to do a groupon and the ones that did understood the situation fully, decided not to do a groupon. Groupon has to be betting that merchants are lazy or stupid or both and won’t do the math up front!

Groupon Buyers or “Groupon Whores” are extremely cheap and do not pay full price, that is why they buy groupons. They have no loyalty to any merchant, just to any 50% off deal. Not returning to pay full price. There are so many new daily groupons, why pay full price. So how does a merchant ever recover from the 1st groupon disaster? The Merchant can’t recover and it is stated in surveys and audits that merchant will not do a second or third groupon because less then 1% of the original groupon Buyers return to pay full price and become a regular customer.

Groupons are very profitable for Groupon. Groupon is on track to grow revenues to over one billion dollars in 2011 by simply sending out e-mails, using the web and local sales reps to sell the merchants. So how long will this Win-Loose scenario last where the merchant is required to subsidize the advertising media, incurs huge loses so the advertiser can make a profit? This doesn’t make sense? It will only make sense if it is a Win-Win scenario.

Groupon advertising as we know it today will change if it is to survive. The merchants will go to the best deal for them. Groupon has attracted the attention of Google, Yahoo, Amazon, Microsoft, 300 US clones, 1000`s of WW clones. The old media advertisers of coupons, the newspaper conglomerates, are now jumping in. Radio, TV, billboards are close behind. The proven media advertisers will be the game changers, as they will change it into a Win-Win for the Merchant, Buyer and Advertiser.

Can Groupon's Business Model Endure Over Time?

Groupon is just another way to advertise your company, products or services. It competes directly with existing advertising models offered by the today’s media advertisers like Newspapers, TV and Radio. Groupon hype has attracted many clones because of the overwhelming attention and potential revenue stream to be made. But the business model is not a true Win-Win and it has to be a true Win-Win for both the merchant and the Advertiser. Today, only Groupon Wins! “No Merchant! There is No Groupon!”

Most merchant’s loose money after they do a groupon. A $100 selling price becomes a $50 Groupon price and the merchant receives less than $25, as the merchant is responsible for taxes and other costs. If the groupon is now a $15.00 loss or a $7,500 loss based on 500 units, how can the merchant justify doing the groupon? Some merchants don't loose money as they have inflated the selling price so the groupon price is close to selling price.

Merchants can’t loose money and stay in business. Today businesses are testing out the groupon phenomena, which claims it will bring new customers to justify the groupon expense. Groupons bring new customers, but the type of customers the merchant is not looking for. Groupon buyers do not pay full price. Groupon is creating a 50% OFF buying mentality. A mindset that says "Why should I pay full price if there hundreds of groupon deals everyday at 50% off. The groupon buyers have loyalty to 50% OFF deals, not to the merchants. So there is No Win here for the merchant.

This business model is successful and will continue to be in the short term. It is a new marketing gimmick and the merchants are testing it. Groupon is another Fad, like Beanie Babies, Pet Rocks and Slinkies. It is not a sustainable business over the long term. After the merchant tries it and realizes how much it truly costs they ask themselves why would I do a second groupon and they don't! The Groupon backlash has started. Small today but it is growing. Just read the blog posts. There are a lot of unhappy merchants and buyers. The merchants are changing the groupon rules and the buyers do not like it. The business model dictates that a merchant must play by Groupon’s rules to have a groupon. If the Merchant says No, then there is No Groupon! This is the beginning of the end of unless a groupon becomes more of a Win-Win for the merchant.

Is Groupon Misleading Buyers & Merchants?

Groupon is being challenged today from Google with the Google Offers program. The Google Offers program builds a win-win relationship for the merchants. Google only asks for 20% instead of 50% of the groupon revenues and Google pays the merchants in 3 days and not in 90 days. Google allow the coupon to remain in affect up to one year. No pressure for the merchant or the buyer to do a groupon. The Google Offers program is targeted to work with the local merchants and the buyers in their respective communities.


Now a class action lawsuit accuses Groupon of selling gift certificates with short expiration dates, knowing full well that many consumers won't use them in time.The suit, filed in federal court in the Southern District of California, takes issue with Groupon's so-called “Daily Deals” -- offerings sent out by e-mail to its “massive subscription base (comprised of tens of millions of consumers nationwide).” The offers cover a wide variety of products and services -- “restaurants and bars, salons and spas, clothing and other retail items, and ... instructional lessons” -- and are sent, as the name suggests, on a daily basis. The deals are only activated if enough consumers decide to take advantage of the offer. The suit notes that “the Credit Card Accountability Responsibility and Disclosure Act ('CARD Act') and the Electronic Funds Transfer Act ('EFTA') ... specifically prohibit the sale and issuance of gift certificates, such as 'groupons,' with expiration dates,” as does a California consumer protection statute. see the whole story at http://www.consumeraffairs.com/news04/2011/01/class-action-takes-on-groupon.html. "Class Action Takes on Groupon" -Says site's coupons contain illegal expiration date -01/28/2011 | Jon Hood | Consumer Affairs.com

If the coupon dates are extended so all coupons will be redeemed, then the merchant has to honor all the coupons. This could make the difference whether a merchant will do a groupon. The cost of doing a groupon severly impacts the merchant's bottomline as they give up 50% of the selling price and then give another 50% of the balance to Groupon. If the merchant hears that 30% of the coupons are not going to be redeemed, this changes the cost of doing a groupon and would attract more merchants as it will cost them less if they only need to honor 70% of the coupons issued. This could be a game changer for merchants thinking of doing future groupons.