Wednesday, February 8, 2012

Oh Groupon

It was announced earlier this afternoon that Groupon had lost $42.7 million dollars in their first quarter as a public company.

Among many reasons, it didn't help that they had an effective tax rate of nearly 1600 percent. Sure that is due to various rates due to expansion expenses in various locations across the globe. But they will need to bring that down significantly in the near future.

However, I foresee a lot of problems going forward for Groupon.

For those that do not know, Groupon and a whole host of other companies (Living Social is most prominent), customers sign up to receive emails regarding specials for various businesses in their area. In most cases, it is for at least 50 percent off of products and services.

It is great for the customer, especially if there are offers that appeal to them on a regular basis. It can be good for a business to increase foot traffic or move product.

But many businesses just lose out when it comes to these types of products. Here is one story and there are hundreds more just like this.

When I had my business, representatives from Living Social dropped by on a regular basis wanting me to run deals, especially towards the end. I was already getting my ass kicked. I didn't need to take a greater beating.

I tried to get the reps to give me solid scenarios where I would actually be able to break even. They couldn't do it. The closest was for them where the customer would pay $10 for $20 worth of product, excluding liquor.

From there, Living Social would take 50 percent, or $5. Then they had all of these other ancillary and processing fees, that would end up yielding me around $2.70. I would take a loss no matter how much alcohol I could move. My costs were not around 15 percent. I never had a chance of breaking even, let alone making a profit. Groupon is very similar in nature.

If they are to ever achieve long term success, they will have to change their business model to attract and retain more businesses. Far too many have been chased off after losing too much money, time and reputation from experiences gone bad. If there are no businesses using Groupon and the like, there will be no customers.

Groupon needs to listen to more to their former customers like what I linked to above. If not, this type of business will go the way of

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