TAKE THE $6 BILLION DOLLARS!

We know that Groupon founders turned down $6 billion from Google to buy their company. What arrogance! That is why I want everyone to remember that I have been writing for months that the Groupon model will eventually fail. When the whole system blows up a few years from now, I deserve credit for being the guru on this. Once again, I will do some math to educate you how, at some point, this pyramid scheme will implode!

To make the math easy, we will use the model that a beauty salon issues 100 Groupons that are worth $50 each. The consumer pays $25 for the certificate. That money is divided equally between Groupon and the salon. Groupon has banked $1250. All 100 people redeem their Groupons and do not buy any additional services. The consumers get $5,000 worth of services and the salon has received $1250, so they are $3750 in the hole. Because most salons split the customer revenue 50/50 with the stylist, the salon will have to book $7500 of NEW services from those 100 clients just to break even. That is most likely not going to happen. Since many Groupon deals are with salons and other small businesses, that market will soon dry up. There aren’t enough new customers, who become repeat customers,  for the business to be able to recover from the loss-leader deal! And that is why Groupon is like a pyramid scheme.

Crain’s Chicago Business wrote a story about how Navy Pier used Groupon to promote Winter Wonderfest. What happened as a result?


“Navy Pier officials blame Groupon for a drop in revenue for its biggest annual festival, though they credit the daily deal site for generating more traffic.


With Winter Wonderfest ticket sales up 12% in volume, but event revenue down about 8% so far, Navy Pier officials are reconsidering whether future partnerships with Chicago-based Groupon are worthwhile.


Groupon offered half-price Winter Wonderland tickets for $9 one day in early November. Mark Thompson, senior director of marketing for the Pier, estimated some 7,500 Groupons were sold that day — a 283% increase from the same Groupon deal offered for last year’s Wonderfest.


Overall ticket sales are running 12% ahead of last year to date.


But revenue is down considerably: Wonderfest has netted $420,000, compared with $455,000 during the same period in 2009.


That’s because Navy Pier, like most Groupon clients, agreed to offer 50% off the full price and then split the proceeds 50-50 with Groupon.


As a result, Mr. Thompson said, the Pier received only $4.50 for each ticket, rather than the $18 normally charged. “


How smart does someone have to be not to realize that if you sell something for $4.50 that costs $18, it’s not going to work! It is especially stupid for limited events like Winter Wonderfest to do a promotion like this because it will not bring in any repeat customers! Groupon ONLY works if one gets new, repeat business to make up for the original revenue loss.


The Chicago Tribune wrote a story in August about Greg Gibbs, owner of Chicago Bagel Authority in Lincoln Park. He signed up for a Groupon deal-of-the-day last January. “His promotion, which cost $3 for an $8 voucher good for any menu item, sold nearly 10,000 Groupons, 10 times more than the top end of Gibbs' expectations.


After splitting 50 percent of the revenue with Groupon, a standard deal for most businesses, the shop netted about $15,000 for $80,000 worth of food. Gibbs said the promotion hasn't yet translated into additional revenue.


‘We just don't get the kind of customer that we want to come back,’ said Gibbs, who saw patrons put items back if their total exceeded $8. ‘It's a lot of people that come once for the discount, nobody tips, and they're all trying to squeeze it into the exact dollar amount.’“


The bottom line is, Groupon costs too much money per one-time new customer attraction for the business to ever recover in the long run--unless almost every new customer comes back again!  If you have a 10% profit margin and are paying 50% to get a customer who might never come back, how does a business prosper? They can’t! Groupon is like three-card Monte, looks easy, can’t win.