1. Hype (check)
2. IPO talk (check)
3. Turn down acquisition at incredibly high P/E (check)
4. Superbowl Advert (check)
5. IPO just in time to avoid running out of money (on the way)
6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets
7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced
8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.
It's a nitpick, but the only irrationality that gets checked is unsustainable irrationality. It's a bit of a simplification to say that profits are actually "equilibrium irrationality," but not by much. If the market were actually composed of rational agents, all prices would be driven down to material cost + wages, and there'd be no need for advertising, either. Forces can, and in fact always do, push the market to irrationality. The only thing the market seems to do is moderate the degree of irrational excess.
I'm not really going anywhere with this. I just have a fascination with people's manifold faith in markets and their powers. It's interesting that "free market theory" flatters consumers (as rational) and benefits businesses (via consumer irrationality). I think that this is why the notion survives so well in popular culture.
(Micro)-Economics is much more like physics; here is how it tends to work, how it tends to optimize, how it tends to in practice actively subvert attempts to predict what it will do (and thereby actively resisting any attempt to create a macro-economic theory, or at least one that lasts for any period of time). It's a very physics-like definition of "efficiency". The fact that the dam broke in the most energy-efficient manner and the resulting water deluge can be modeled with a high degree of accuracy by assuming it will follow the least-energy course in an efficient manner doesn't make the resulting flood "good" or "desirable"... just... efficient.
On the other hand, start your economics model with anything else and it's like trying to rewrite physics starting with material ether or something. I have "faith in the markets" in much the same way I have faith in physics (which I will remind you contains a lot of similar "merely statistical" theories, what you learned in school is the aberration, not the rule, and also is really strong on the fundamentals and gets progressively weaker as the systems get larger, rather like economics), but that doesn't mean I blindly trust them. Physics will kill you without blinking. But if you want to prevent that, it's a lot better to come to understand the laws of physics than to try to create new rules for the universe by sheer force of denial. Trying to guide the physics while actively refusing to learn about it is doomed to failure, too. Same for microecon.
However, it's not efficient, since there is a lot you can do to make a better guess than assuming it is a completely random process.
While this will make it more efficient, there are plenty of people making random guesses, which reduces the effect your better guesses have on the overall efficiency of the market.
There are also plenty of fools, and they are investing on all sorts of techniques which ignore any of the global considerations, and of course this is how bubbles expand.
I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.
If I raised a few hundred million dollars, I could create a website where you went, and gave your credit card number. I would charge your card $1.00 and then credit your card $1.40. I would be Groupon, except I would be slightly more profitable.
The facts of the housing bubble were widely argued during the bubble itself, and yet after the crash, somehow, 'no one saw it coming'.
I had some friends visiting SF, and they had bought Groupons from various outfits for the trip. But they ended up not using a few of them, and gave them to me. Chances are I'll end up using them, but I wonder: how many such Groupons expire unused?
For a stored-value medium that's like a gift card, many states prohibit an expiration-to-zero-value. Groupon has been sued a bunch of times over this; at least in those states, I think their current policy is that the business must still honor the Groupon for the original purchase price (but not the ~2X face value).
This blog post by Andrew Mason suggested lawsuits were unnecessary because customers unhappy for any reason, including expiration policies, could always rely on 'the Groupon Promise' for a full refund:
http://www.groupon.com/blog/cities/groupon-organizes-class-a...
However, if you try to get a refund on an expired Groupon, they'll reject your request. So Mason's blog post and 'the Groupon Promise' are deceptive... and Groupon probably deserves to be sued over the gap between the unequivocalness of their 'promise' and the way they carve out exceptions in practice. They talk the talk of a 'customer is always right' retailer, but their model seems to require them to be stingy with refunds.
Also, it sounds like you're saying that the Groupon Promise is not honored. I wouldn't be at all surprised to see that tested in court soon, too.
Because some merchants track redemptions on paper, Groupon has no way of knowing how many unredeemed Groupons are outstanding.
The root of the problem, and the reason Groupon's model is unsustainablem, is that most of these businesses are not producing a product that is different or so unbelievably valuable that people are going to continue to come in and buy it at a price that is profitable in the long run. People go to a coffee shop because it is close and convenient. All coffee shops serve a commodity that is in a price range that varies by only a few cents. Their only way to differentiate is with location. Period. With restaurants it's a little different because food costs and quality vary a bit more, but I still maintain that the only people who regularly buy Groupons are deal-hunting cheapskates who won't be back regularly. All businesses would do better to focus on their core products and pricing, and let word of mouth do the rest.
For a coffee shop owner to run a Groupon promotion to bring in foot traffic thinking it will pay off is lazy, stupid, and shows very poor business acumen.
The biggest parts of this are the account risk, the needing to grow revenue to pay existing liabilities (which is and should be a huge warning flag for any enterprise) and just how much room there is for someone to do this better.
My only fear is that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley.
Suggesting that a poorly performing companies weak IPO, or otherwise, will taint other IPOs and prompt regulations makes no sense whatsoever. For the health and vigor of the tech markets, Groupon's IPO should be a spectacular failure based upon the poor business model and weaker financial position.
At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money.
Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".
In fact, as someone who has resisted the characterization of Groupon as a "Ponzi scheme" on the grounds that I prefer the term actually mean something specific, this has gone a ways to explaining how that may actually be true. But the interesting scheme isn't so much in the investors, where people have been talking about it, but in the way that businesses are being paid with revenues from the subsequent Groupons, and so on. There's a lot of loan risk in a lot of directions on Groupon's balance sheet. It seems to me they don't have to be off by much for it to crumble. "Collapse" in the title is not just a linkbait word, the author really outlines how the whole thing might very quickly collapse.
I disputed this same point last week: http://news.ycombinator.com/item?id=2617760
When an author deals with a book publisher, he/she gives up some of their future revenues in exchange for cash in advance and publicity.
Likewise, when a local business deals with Groupon, they are giving up part of their revenue in exchange for upfront cash and publicity.
The main difference might be in the actual numbers (cash upfront, revenue share %, etc).
The risks pointed out remain, and are very real though.
It's entirely different, actually. The risk to publishers is much lower because the book publisher, not the author, control the means of printing the books. In Groupon's case, Groupon would be like a publisher paying in advance to a printing company. There's nothing wrong with such an arrangement, but those that invest in the publisher should acknowledge the risk that the printer will go out of business before delivering. It's doubly risky if the payment terms ensure that the printer will lose money on each book printed.
Unlike Groupon, which might have to reimburse its customers if a client business goes under.
Furthermore, AFAIK author deals are screened/filtered, a bad book will not get published (not that this is a 100% accurate process, see for example 4 Hour Work Week).
Judging from the article, Groupon does little screening, so their risk is much greater.
While I got a chuckle out of this, given the financial success of the book, it's a good book from the publisher's perspective.
For a lot of businesses their excess capacity is a lost cost anyway. They have to pay their staff regardless or not they do work. A customer might cost $X to service, but that completely ignores the fact that the company would have to pay $X even if that customer wasn't there.
Sure Groupon might not be matching that spare inventory to it's deals with great precision at the moment, but it's only going to be a matter of time.
Look for example at GrouponLive, their partnership with Livenation who are the largest entertainment ticketing company in the world. Does anyone seriously think Livenation are having wool pulled over their eyes ? - they know that yield management is important and Groupon are probably going to become the leaders in that space.
A large amount of Amazon's valuation came from the fact that they'd be able to extend and become the dominant online retailer in a huge number of product categories.
For example, take this: "I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers.
A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one."
Let's look at what's happening here. There's actual, real-world evidence that the author may be wrong - small businesses are returning to Groupon. This doesn't make sense if Groupon is really such a terrible deal. So the author tries to explain this evidence.
What's the best way to do this? Go talk to the business owners who return to Groupon, and ask them why. That's what most people would do when trying to understand their behavior.
But instead, what does the author present? He talks to one of Groupon's competitors! The competitor, non-surprisingly, tries to dismiss this evidence. And he specifically tries to imply that the businesses doing this are not acting properly, comparing them to people who habitually overspend.
I'm not saying the author is wrong - but this is not the right way to make this point, and is simply a way to take a dig at Groupon, and dismiss the people who might prove that Groupon is worthwhile.
Or take this: "I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon."
This is a cheap-shot, thrown in at the end of an (otherwise legitimate) paragraph. Either there are real cases or there aren't, but just saying "I've heard some people complaining" is just terrible reporting. If you think Groupon's done something wrong here, talk about it, don't just mention it offhand to tarnish their reputation.
Conclusion: Like I said, I don't know whether Groupon is good or bad for businesses. I don't know if many people truly know, actually. But articles like this, which go out of their way to bash Groupon, are not the right way forward.
They'll make up some waffle that regurgitates GroupOn talking points in order to justify their actions to an outsider without giving away the fact that the company is on the verge of bankruptcy & if word gets out all their staff will walk.
Journalism does exist, of course, so obviously there are ways around this problem. They're pretty easy to see even in this case - journalistic confidentiality, i.e. the journalist won't reveal the source, therefore no one will know anything about which company is on the verge of bankruptcy.
From a consumer perspective I unsubscribed a few months ago as I really didnt want to hear about a Botox or Massage deal each and every morning. It was good for xmas presents I will admit but in my local area the variety of the offers was somewhat limited (and Its by no means a small town), I shouldnt imagine I will check the site until around mid December again.
Well, now we know how to get $62,500 out of a small business: Offer them $7,000 within about 5 days. This is the salient point of the article: Groupon is more than just a marketing vehicle, it has a financing angle to it that should be evaluated in terms of risk.
Ie: Speculation leads to lower investor confidence leading to pulling out of investments and so on so forth
It's almost the other way around: Groupon spends $1.43 to buy $1.00 of revenue, but boosters are speculating that they can pivot their model or harvest more revenue from their merchants and email list to make $1.44 revenue from every $1.43 they spend.
Looks like the daily deal company did absolutely no checking that it was legit or the business did as this article suggests and knew they were going bankrupt anyway.
I started asking around and found a few similar stories from friends and colleagues. Hoping to see all of this hit the news soon.
Which clone was it?
Rhymes with Groupon.
Yes, you have to actually work to maintain those new customers, just like always. In fact, you'll probably have to work a little harder than normal, since their first experience at your business is at a huge discount.
But treat them right and let them know what they're in for and it's no different than other other coupon scheme designed to lure customers in. Oh, except for being a huge buzzword right now and attracting more customers than would normally be possible.
Yes, you heard that right, I'm saying that Groupon can be a really good thing for your business if you jump on now. But ONLY if you have properly prepared for it, and negotiated with Groupon correctly.
Don't let them badger you into a bad deal for your business. You would be better with no deal than a bad deal.
See: http://www.guardian.co.uk/business/2011/jun/10/only-fool-inv...
It reminds me a little of when there were a few dissenting voices claiming the US housing market was due a correction and yet prices kept going up.
Google Offers pays merchants faster (80% of the money goes to the merchant right away, vs 33% with Groupon). The OP expects this will force Groupon to make the same deal with merchants, which will change their business model, which will put them out of business. That or Groupon won't change its business model, and Google Offers will run them out of business by virtue of this better deal.
IMHO, going from that small point to "Groupon is poised for collapse" is just a bit hyperbolic.
This is not on Groupon or any other Daily Deal service. It solely relies on the Small Business owner that does not do his due diligence.
This model is no different than bulk purchasing from a supplier. However, the supplier still makes money because they have figured out how much they can give to still turn a profit.
Small business owners need to either look at how much they stand to lose or take this as a advertising expense that they can afford.
The whole get money now and cry about it when people actually expect to collect what they were promised is ridiculous, where do they think the money comes from?
If you want to say that this model is only sustainable as long as small business owners are incompetent then yes, lets say that. However, to say that this business model is bad based on Groupons lies is just ridiculous. No one is holding a gun to your head and saying, give us coupons for all your stuff.
1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk.
2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter.
3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per.
4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.)
so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs.
I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage.
Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so.
Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using.
Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good.
What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.
If word of this gets around, the incentives set up by the typical Groupon agreement with a merchant will be responded to by merchants for whom those incentives are the most perverse. Groupon may discover that it is inexorably moving into the business of last-ditch financing for failing businesses.
> If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants.
I found myself laughing villainously as I read that. Google offers to by Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme into overdrive. Oh, it feels so good! Google, I forgive you everything!
By the way, didn't we all flip the scam bit on Groupon months ago when this article showed up here on Hacker News:
Groupon in Retrospect (posiescafe.com) http://news.ycombinator.com/item?id=1698833
My guess is, probably not.
ps. my favorite quote of this emerging IPO debacle has been thus far..
"Groupon's IPO prospectus should raise several red flags in a sensible investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving more red flags than a May Day parade."
Now that's a great visual.
http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsk...
Despite the fact that Groupon shifts the marketing costs from the merchant to the customer, it probably won't affect couponing behavior in the long run. To me this is like chess where the players have switched sides after a match. It's the same game, but a new player gets the first-move advantage this time around.
Groupon Now! seems slightly more interesting and possibly has more potential.
My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be bought out by some media/new media conglomerate by 2014.
When Google offered $6bn for Groupon I was... surprised. What surprised me more at that time was that Groupon declined the - already exceedingly overpriced - offer.
Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn (P/E of 1,139.40!!). Facebook is said to be worth $100bn.
I think we collectively lost our value judgment when it comes to Internet companies.
Then there are the people who never redeem their groupons. I'm about to move to another and leave two groupons that I never got around to using unredeemed.
