Earnings Report: Has the Groupon Daily Deals Business Model Failed?
By emeadows
September 6, 2012
September 6, 2012
- Analyst and journalist Rakesh Agrawal predicted a year ago that the Groupon business model would not be successful. Dismal second quarter numbers suggest he may have been right.
- As Agrawal wrote then and Slate now summarizes: “Groupon was riding high because its most important constituency — the small businesses who slashed their prices to entice Groupon’s customers — was getting ripped off.”
- “Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business,” wrote Agrawal in an editorial from June 2011.
- The small business has to agree to a reduced price on its product or service, along with agreeing to provide Groupon with an often 50 percent chunk of the proceeds.
- “For instance, if my fast-food shack normally sells a burger-and-shake combo for $10, Groupon will want me to offer it for $5, and then take half of the $5 sale — so I’ve just sold $10 of merchandise for $2.50,” explains Slate.
- Businesses were attracted to the pitch because of the promise of being paid their cut immediately, along with the proposed exposure that would have customers returning again in the future, at full price. But many owners never considered that these deal-hungry consumers would never come in again.
- For some businesses, it can work, like new companies, or those offering long-term deals or ones that have had previous success with Groupon.
- “Agrawal sees this as evidence that Groupon’s merchant base is narrowing down to just the businesses that can do well with such promotions,” notes the article. “That’s certainly good for the small business community, but it isn’t good for Groupon, which sold itself as a company with limitless growth potential.”
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