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Jessie Burke, the owner of Posie’s Cafe a coffeshop in Portland wanted to boost her sales so she turned to group buying site Groupon.
Before she knew it sales of her promotion on Groupon went through the roof. However the Groupon promotion nearly bankrupted her business.
Groupon sold to consumers a $13 Posie’s credit for $6, and then kept the entire $6. Posie’s Cafe was on the hook to deliver $13 worth of cookies and coffee to a new customer. Poise Cafe received no money but the customer expected $13 worth of cookies and coffee for the $6 they spent on Groupon. Posie’s Cafe had to finance the entire purchase itself.
Over 1000 customers used the promotion, but the cost imposed by those customers resulted in disastrous losses for Posie’s Cafe. After three months of Groupon coupon redemptions, Posie’s Cafe could no longer meet payroll because at that point the coffee shop had lost $8,000. Jessie Burke, the owner had to take out $8,000 of her personal saving to cover payroll. The irony is that each Groupon redemption was considered a sale, so $13,000 worth of good were sold but Posie’s Cafe was in the hole to the tune of $8,000 and Groupon made a profit of $6,000.
Eventually, Posie’s and Groupon agreed on a 50% cut: Groupon would get $3 and Posie’s would get $3. Groupon’s $3 was almost pure profit, but the cafe had to use its remaining $3 to cover the costs of $13 worth of cookies and coffee and still ended up in the hole.
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So wait – reporter… who was at fault for this? Did the business sign up for a bad deal? You make it sound like Groupon did something wrong, but I can't tell what it is!?
And why do you say that Groupon's cut is "pure profit" — do you think that Groupon's employees work for free? or that any other part of their business has no cost? office space? servers? marketing activities?
Seems like very strange reporting!!!
Comment by Ted Shelton — September 24, 2010 @ 11:58 AM
What is the actual cost to Posie's of "the value of $13 worth of cookies and coffee" (ingredients, labor, energy, facilities, taxes, etc.)? Whatever that number is (apparently more than $3, if they are "still in the hole"), then that amount is Posie's customer acquisition cost for each of the new customers from this campaign.
This isn't a Groupon problem… Posie's cash-flow simply couldn't adequately finance their new customer acquisition via Groupon. I wonder how many they thought they would sell – how many were budgeted-for?
Curiously, there is no mention about the number of new customers (how many of the 1,000 sales were to new customers), or any increase or decrease in overall revenues subsequent to the campaign…
I wonder if they had any way to measure the effect of the campaign, or the ability to limit it to new customers. What a tragedy if these were all existing customers (although you could make the case for customer retention – is there a Starbucks nearby?).
And using personal savings for payroll? I know that small business loans are notoriously hard to get (especially for meeting payroll). But if I were at Groupon and Posie's was one of my clients, I'd be encouraging Jessie Burke to sign up for as many SCORE and other free business education programs as possible.
Comment by Bayard Saunders — September 24, 2010 @ 1:40 PM
I love it – WebGuild is fearless they tell the story as it is.
Comment by John Amos — September 24, 2010 @ 1:40 PM
I heard the original story was changed a bit. Maybe Groupon threaten them.
Comment by Tagine — September 24, 2010 @ 1:43 PM
This is pretty irresponsible reporting. As written, it smelled fishy — you make it sound like Groupon victimized the cafe, but how can that be? Surely the cafe contracted for this.
Ten seconds of research shows the truth. I’ll let the cafe’s owner express it:
“I take full responsibility for my decision, as you will read in the post below. Please do not attempt to interpret this post as me blaming Groupon or our customers for anything. I am merely sharing the experience. The decision to run a Groupon campaign was my own decision, and one I regret. Lesson learned.”
The folks at the cafe sound great and if I lived there, I would want to become a customer. And their Groupon experience was a horror for them. But you took the bad news, stripped away the value, and posted the sensational remains. Shame on you.
Everyone who has read this far should read the story on the Posie’s Cafe blog. It’s a valuable lesson, explained in a responsible way: http://posiescafe.com/wp/?p=316
Comment by Moe Rubenzahl — September 24, 2010 @ 1:48 PM
Dont get what a Starbucks nearby has anything to do with this.
Comment by Starbucks Fan — September 24, 2010 @ 1:50 PM
Groupon reps just screwed these little guy – I mean women.
Comment by Tim S — September 24, 2010 @ 1:52 PM
I personally think that this is STILL pretty good press for Groupon. Why? Because reading between the lines one can see Groupon didn't do anything wrong, and because it highlights the power they have to bring customers to a business. The key is to sign a deal that turns into profits, not just losses.
I'm quite fine with the way WebGuild reported this news.
Comment by RBF — September 24, 2010 @ 2:27 PM
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Great response. Right on the money
Comment by Darryl — September 25, 2010 @ 5:42 PM
Guys , Guys – Hold on for a moment here.
This is classic marketing and a customer acquisition challenge. The key questions is what is the LTV- Life time value of the customer ?- assuming a fraction of them ( say 33 % ) will come back if the experience was good , you can assume they will spend say $ 10 a month on an average for say 10 months over life time ( again an assumption ) , the benefit from the campaign or economic value to the cafe is – 33300 $ revenue and assuming 50 % gross margin, a contribution of about $ 16,600. So the cost of feeding the 1000 people free is say at 50 % cost is $ 6500.
Separately , if the cafe did not have the cashflow to spend this $ 6500 , then they should not have done it – just like they should not spend on an advertisement or bill board $ 6500 if they can’t honor the payment.
Nothing to do with Groupon IMHO.
some Suggestion – keep a limit on the coupons , keep the coupon validity to items wherein the margin is high – for example – free coffee but cookies that are bought out items are paid for , keep the coupons valid during lean hours etc etc – But remember , all this will reduce the numbers using the promotion -
Comment by Ganesh — September 25, 2010 @ 6:42 PM
[...] Groupon: Coupon Site Almost Bankrupts Small Business [...]
Pingback by 3 Quick And Easy Ways To Build A Profitable Opt In List | The Internet Marketing Strategy — September 25, 2010 @ 7:14 PM
It is even greater free publicity for Posie's Cafe. Whoever had heard about them in the blogosphere prior to this? I think Posie got way more bang for the buck with this episode. Well done, Posie!
Comment by Vinay — September 27, 2010 @ 6:16 AM
Groupon sounds like an online mob. Pillage (at low prices)!!!
Par for the course for the Internet — steal or get it damn close regardless of the impact on others.
Comment by I love you — September 28, 2010 @ 3:52 PM
This shows that Groupon business model is quite limited. It does not work across the board with SMBs as billionaire investors perceive it to be. Most businesses simply don't have large enough margins to cover. If a business doesn't have a good handle of their expenses as in this case, they may sign up. Groupon will ride this hype for a while but soon the stories will get out that the value a business receives in return simply isn't there. They will ultimately succeed as a niche player.
Comment by Woot — September 28, 2010 @ 10:08 PM
I've used both Groupon and their competitor Living Social. The following is based on my experiences with both.
Groupon does a 50/50 split, but they spread out payment of your cut over a number of months. With Living Social it's 60/40 (they get 40 you get 60) Also Living Social gives you your full cut in 2 or 3 weeks.
Also, Groupon makes you sign an agreement to not to offer a "similar deal" as the one you did with them for a set amount of time. As it's worded, it means you can't offer a heavy discount on the same thing you advertised with them, which makes sense because if you did it often then it's obviously not such a good deal. Well, once they have that if they see you offering *any* great deal on anything else you offer they call you up and start with legal threats, threatening to sue. Nothing ever came of it but it made an already stressful day (due to the large amount of business coming in) much worse for the business owner involved.
Also, in my city groupon only pulled in under 100 customers while Living social pulled in over 400, but I've noticed that trend is reversed in some other cities.
Comment by I've used them — October 4, 2010 @ 1:37 PM
This is really unfortunate. I know there are a bunch of new businesses sprouting around college campuses. Kegfly.com is starting in the midwest at three colleges in Ohio and one at Boston University. I hope local businesses in these locations do not suffer the same fate.
Comment by Bart — October 19, 2010 @ 7:35 PM
The idea is that small businesses are always in danger of losing customers to big chains and that if there is a Starbucks nearby, the goodwill that the Groupon generates could be worth its cost if it helps retain existing customers.
Comment by EMT — November 29, 2010 @ 7:19 AM
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Comment by Gregory Desmith — January 2, 2011 @ 3:38 PM
I've heard a bunch of companies were not very successful with Groupon. That being said, the company who decides to use Groupon needs to decide if it's worth it. Just like any business decision.
Comment by Brandon — January 11, 2011 @ 2:50 PM
It's well known that Groupon squeezes local businesses to provide deeply discounted deals to bargain hunters. What's not so well known is how little money the local businesses actually get from Groupon. Typically only HALF of the Groupon ticket price goes to the local merchant and half goes to Groupon. When a Groupon ticket is priced under $10, the small local business gets $0 from the ticket price, Groupon takes it all.
Fortunately, there may be a Hack that can help local merchants who have been “Grouponed”. Bargain hunters should avoid buying the deal from Groupon and instead wait for the deal to end. Next, print the main section of the deal page and take it to the merchant as you would any coupon. The merchant will most likely give you the deal anyway because you are paying the merchant TWICE as much as Groupon does for the same deal.
Approaching the merchant directly with your printed “coupon” helps your small local business stay afloat while cutting out a giant corporate middleman. To put it in the parlance of a corporate salesperson: “This is truly a win-win!”
Comment by Lloyd — January 18, 2011 @ 9:15 AM
The time isn’t too far off when we could be ready to use our cell phones in physical retailers to get coupons and redeem them, without ever employing any paper or copying anything. And these are not simply predictions. There is certainly a company working on this suitable now. It’s called ShoppingTrip360. It uses sensible light sensitive shelves in order to know when a item is picked up or put back down. It can alert the shop to a stockout immediately, and it can even alert the staff to a misplaced item, as long as that item has a several shape than the item that is supposed to be in that location. But what does that have to do with coupons? They are also working on extending that technique to produce cell phones with information about the merchandise near the customer. Then the cell phone would be capable to find coupons for the customer based on the merchandise suitable next to him or her! That way, without possessing to search stuff up and bring stuff with you, you’re able to ascertain the lowest priced item on the shelves right in front of you soon after taking coupons into account! It is going to be a no-hassle process of acquiring coupons.
Comment by Online Shop — March 1, 2011 @ 1:11 PM
We just ran a Groupon deal. We saw a very low return rate for new customers, since most of them are, as we so poetically dubbed them, "coupon-whores" who won't be returning unless they can somehow get something for free. Sorry, is my bitterness showing yet? The Groupon customers we pulled (and our business is in Portland as well) were not the type of people we would have wanted in our store. They had uniformally disrespectful attitudes towards employees and were just plain rude. And you also get the people who try and use the same groupon twice. And God forbid if you point that out to them. And don't forget after you are done with the deal. Then the real fun starts. All the people calling in, asking if they can still redeem their coupon, yelling, actually, literally yelling on the phone when they can't get their way. My experience has been that Groupon is a pain in the ass. I was extremely unhappy with their service and won't be returning.
Comment by Jonno — July 6, 2011 @ 4:31 PM
The idea is that small businesses are constantly in danger of rearing back customers, large chains, and that if there is a Starbucks nearby, Groupon generates goodwill that could be worth its cost if it helps to keep the stick presented to the customers.
Comment by jen7refla — September 13, 2011 @ 11:58 AM
Disregard all of the bad reporting and lack of business expertise by both the author and the business owner… I bet the company in question has a much larger customer base now that they did the groupon… they received 1000+ new clients at about $12 each….? If the company was good they would convert each of these clinets into a lifetime customer who in fact would be worth a lot more than $12…. they should have tried harder to upsell each groupon in order to break even.
Comment by Scott Bartell — October 1, 2011 @ 7:12 AM
In Holland Coupon websites are a great success. Before ordering something on the internet a lot of people search for a coupon first.
Comment by Zalando kortingscode — March 1, 2012 @ 3:37 AM