GROUPON WILL EVENTUALLY SELF IMPLODE

Sometimes I think I am the only person in America who pays attention to the math. I discovered a HUGE flaw in the Groupon coupon model last week that Google better figure out before they pay $5 billion for the company.

First some background. Everyone knows that Groupon is one of the fastest growing companies in America. They make their money online by selling retail discounts from 50% to as much as 90% off and then charge the advertising company 50% of the coupon price. A mathematical model that seems to work, but just wait a few paragraphs for the kicker!

Second, unrelated to the flaw in the mathematical model, I just wanted to remind everyone that on October 25th I wrote a blog, “Whose Money is it?” where I related how Governor Quinn had just handed Groupon $3.5 million. The money was for jobs in Illinois, but if one divided the hand-out by the 250 jobs they company claimed they would create it worked out to about $14,500 per worker. That is a nice incentive for any company!

I checked out their web site today for employment and there were only 26 jobs listed for Chicago. So much for their claims of 250! If Groupon closes the multi-billion deal with Google, they should return the $3.5 million to cash-strapped Illinois!

Now to the flaw. Please put on your thinking caps here, so you can understand the error that occurs when Groupon offers a deal involving merchandise. It does not work for the restaurant or salon deals because once the consumer has used the Groupon, there is nothing to return.

Groupon offered a $50 Nordstrom's Rack certificate for $25, which I purchased. Half of that ($12.50) goes to Nordstrom's Rack and half goes to Groupon ($12.50.)

I took the $50 Groupon and bought a pair of boots at Nordstrom's Rack that cost $60.10 (originally $120! Good sale!) with tax. To pay, I handed over my Groupon and my American Express card. I don’t know why I did not just give the extra $10.10 in cash, but, as you will discover, I am glad I used my credit card.

When I got home and tried the boots on with socks, they were too tight, so I decided to return them. The next day I took the boots and my receipt back to the store. The clerk asked me if I wanted the refund put back on my American Express. I said, “Yes,” figuring I would get a credit of $10.10 and a $50 gift card to spend at Nordstrom’s Rack because I had used a Groupon to pay. But no! The store refunded the entire $60.10 to my credit card!

So think about it now. I paid $25 for my Groupon and got $50 back! Nordstrom paid $12.50 for the privilege of running a Groupon and paid me $25 for NOT using the Groupon. It cost them $37.50 for me NOT to buy anything! The remaining $12.50 of the $50 transaction went to Groupon. The winners here are Groupon and me! I was not planning on scamming Nordstrom's Rack when I returned the boots; the store’s own stupidity cost them big!

Once other retail operations realize this mathematical flaw that happens when a customer returns a product bought with a Groupon, they won’t use the service anymore and the company’s business model fails. So much for Google paying $5 billion—unless they paid with a Groupon and got the company for half price!