A look at Groupon’s extremely lopsided merchant agreement

See the Groupon, LivingSocial and daily deals merchant FAQ.

Last night I posted a Groupon merchant contract  I received. When reading this analysis, please keep in mind that I am not a lawyer and this is not legal advice. It’s simply an analysis of the key points of the agreement.

My background is in product management and business development. I’ve read a lot of contracts. I focus on things like pricing, payment terms, exclusivity, branding, intellectual property, liabilities and indemnification. I usually gloss over things like implied warranties because that tends to be boilerplate and if there’s something wonky, I don’t have the expertise to catch it anyway.  Also keep in mind that this agreement is a bit more than a year old. There are likely newer forms out there.

Overall impressions

The Groupon merchant agreement is incredibly lopsided in favor of Groupon, as are most agreements where one party doesn’t really have the ability to negotiate.

Groupon puts the onus of incredibly complex issues like taxation, compliance with gift card regulations and escheat on the merchant. These are issues that multinationals with armies of lawyers struggle with. If you’re running a small coffee shop, restaurant or nail salon, you likely have no idea what any of this stuff means.

Because Groupons are so new, no one really does. Groupon’s stance is that it’s the merchant’s issue, not ours. And if somehow it becomes our issue, you, the merchant owe us money to fix the issue. That’s a potentially serious obligation to be signing up for given the uncertainty in the legal and tax treatments of Groupons.

As a large company with access to greater legal resources, Groupon is in a much better position to make recommendations to merchants. But they’re not doing that. (So as not to be liable.) Spending money on a lawyer to analyze these terms would make no financial sense for a merchant.

The most important thing for merchants is that this is not a standard advertising agreement. Evaluate it as if you were taking out a $10,000-$15,000 loan.

What’s negotiable and what’s not

The formatting and structure of the agreement implies that the parts in “Groupon Terms and Conditions” are negotiable and the ones in the section labeled “Merchant Agreement” are not. The first section is what’s known as a “Term Sheet.” A local sales rep is not likely to be able to change the terms in the “Merchant Agreement” section. (Of course, for large national deals, everything is negotiable.)

Groupon Terms and Conditions 

The key components of the Groupon Terms and Conditions are the value of the offer, the duration, the revenue split, any special restrictions, the tipping point (volume threshold) and payment terms.

The revenue split varies. I’ve talked to businesses who were asked for 100% of the revenue generated from a Groupon, but 50% is more common. On average, across all deals, Groupon is taking 42% of the deal. A small business is not likely to do much better than 50%, unless it’s a special case. That doesn’t mean you should do a deal that is bad for you — see best practices for businesses considering daily deals.

The tipping point is largely useless as most deals nowadays will hit the tipping point and Groupon can unilaterally change it.

I was surprised to see the payment terms in this section of the agreement. This is especially important now that Google is offering merchants 80% of their share within four days of the offer. In this agreement, the merchant gets only 1/3 within 5 days. Note that the merchant here is paying for the credit card fee on the entire transaction (even the portion Groupon keeps). And the merchant is paying for sales taxes, if any, on the entire transaction. We’ll talk more about taxes in a bit.

This agreement doesn’t show it, but merchants can also cap the number of deals that they sell. This is important because it can reduce your potential liability. If you don’t cap your deal, you may have a lot more customers than you can deal with.

Merchant Agreement

No guarantee that the offer will run. (1.1) Just because you do the deal doesn’t mean Groupon will run the offer. It has the option to, but it doesn’t have to.

Termination. (2) Groupon can terminate the voucher and the entire agreement at its discretion, but the merchant cannot.

Exclusivity. (2) It’s weird to see exclusivity buried under a heading of “Term and Termination”. Note that the agreement has two dates, the date of the agreement and the date that the offer runs. Because merchants have no control over the scheduling of the offer, they could be tied to an exclusivity for months in which they can’t run any other online deals. Read literally, merchants couldn’t even Tweet out an offer to followers about a special they were offering for the night. (In a typical commercial agreement, exclusivity would be limited to a list of named competitors, such as LivingSocial and Google Offers. This language is wide open.) Merchants are bound by this exclusivity even if Groupon never runs their offer. If Groupon were devious, they could go around town and sign up various merchants with very generous terms and never run them, just to keep them out of the hands of competitors. Exclusivity is one-way. While you can’t run offers in other online venues, Groupon can run offers for your competitors until the cows come home.

Taxes. (3.1) Merchants are on the hook for sales and other related taxes. This is a complex area. What is the taxable value? Is it the face value of the Groupon? Is it the price paid by the consumer? Is it the value that the merchant receives? Who knows. I would guess that it’s either the price paid or what the merchant receives. (The difference between the face value and the face price paid by the consumer should be considered a store discount.) I’ve found that some merchants ignore this altogether and just deduct the full value from the ticket before calculating sales and other taxes. That’s clearly wrong.

Compliance with local liquor laws and other regulations. (3.1)  Some states prohibit discounts on alcohol or require merchants to maintain certain proportions of food to alcohol sales. It’s up to the merchant to figure this out. (I had to look up “refulation” to make sure it wasn’t some new thing I hadn’t heard of. It’s a typo.)

Indemnification. (3.2) If something goes wrong and somebody sues Groupon or the tax authorities go after Groupon, the merchant pays Groupon for its costs and attorney’s fees. The indemnification has no limit of liability. It’s common to limit liability to the value received from the deal or some multiple of it. Indemnification is one way. If Groupon screws something up and someone sues the merchant, the merchant is on its own.

Gift cards, certificates and escheat. (4) Because Groupons are so new, their legal treatments is uncertain. They could be considered gift cards, which are subject to federal and state regulations regarding validity periods. The CARD Act of 2009 put into place a national standard. Whether CARD even applies to Groupons or not isn’t known. States are free to have tougher standards. The National Conference of State Legislatures also tracks this. Escheat laws may also apply. If escheat applies, any unused funds goes to the state. Again, figuring all of this out is the merchant’s responsibility.

Even if we knew definitively what laws apply, there’s no clear tracking of any of the obligations. If a consumer walks in with a printed voucher, is that enough to prove value? Is it the merchants records? Is it Groupon’s records?

Revenue and profit. (6) You may see no money and make no profit from running a Groupon. This is pretty much boilerplate in such agreements, but given Groupon’s economics, I want to point this out as a high likelihood, not a remote risk.

Groupon’s liability. (6) If something goes wrong and you happen to be able to sue them for something, Groupon’s liability is limited to the Opportunity Fee. What’s an Opportunity Fee? Who knows? That’s a term that should be defined somewhere in the agreement. (I really hope they’ve cleaned this up in later versions of the agreement; this is incredibly sloppy lawyering, as is a reference to “GROUPOIN”.) My guess based on the marketing speak  is that it’s Groupon’s cut of the deal. So if a merchant does a deal with $10,000 in face value with a 50/50 split, Groupon’s maximum liability would be $2,500. So merchants have unlimited liability to Groupon and Groupon has $2,500 liability to the merchant.

Jurisdiction. (6) If something goes wrong, sue Groupon in Illinois.

Some things not addressed in the agreement:

Fraudulent redemption of offers. Merchants have been eating the loss on fraud from people printing multiple copies of offers. Groupon offers ways to alleviate this risk, but some merchants don’t have the infrastructure in place to take advantage of online validation.

Disparagement. There’s no non-disparagement clause. Say all of the bad things you want about Groupon. But it also works in reverse. I’ve heard merchants complain that if things go wrong, Groupon has sent emails to all purchasers disparaging the business, saying that the business didn’t meet quality standards. Groupon has the email addresses and the business doesn’t. This presents a reputation risk to your business if something bad happens.

Refunds and chargebacks. There’s no information in this agreement on who is responsible for customer service refunds provided by Groupons under the Groupon Promise. I’ve got to believe that new versions of the agreement have addressed this.

See also:

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About Rakesh Agrawal

Rakesh Agrawal is an analyst focused on the intersection of local, social and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.
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62 Responses to A look at Groupon’s extremely lopsided merchant agreement

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  10. tinagleisner says:

    What a fascinating way to learn about Groupon, how it works and why it’s a good deal or not. Makes me wonder what folks were writing about when google adwords first came out but that’s history as they say. Thanks for sharing

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  24. Daniel says:

    The problem with businesses not being able to cope and also the massive commissions groupon charges, we have attempted to address with our new website, we do this is 3 ways

    1. Allow business to set a maximum limit to our number of sales, which means they won’t be flooded. Groupon obviously try not to allow this, as they want to simply make as much money in commission as possible.

    2. Only charge half the amount that groupon charges and we could even do less, if we didn’t have a ‘rolling reserve’ with our payment service provider

    3. We also don’t pressure businesses into offering 70-80% discounts, just what they can break even at, as a minimum!

  25. Positively compelling blog post.

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  28. Thanks for the feedback guys! I really appreciate it!

  29. The Groupon business model:

    Sucks money out of the local economy and into the hands of a corporate (EG Groupon).
    If the discount-deals company is be based in another country so the money is being taken out of your own economy.
    many small businesses will end up paying less in tax because of the profits being eroded.
    The big corporate businesses such as Groupon with have top-notch accounts and pay less revenue (proportionately) than small businesses of there will be less tax for the government coffers.
    Large discounts are unlikely to produce customers that will return.
    Potential for annoying your important existing customer base.
    People will look for discounts as the cornerstone of their shopping habits – it destroys loyalty.
    Businesses will be losing customers as their existing customers join the Groupon feeding-frenzy.
    Local businesses will start competing with one-another through fire-sale prices.
    People will ask for discounts even when none are on offer – it will become a de-facto standard method of shopping.
    Groupon are already recruiting affiliates to shill for them – creating a sales force out of the bargain hunters.

    All in all, it looks like a sure-fire way to kill off many types of small businesses.

    A funny but serious take on Groupon etc.:

    http://www.thedailydross.com/html/vancouver-riots-1304.html

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  35. This is the real picture when it comes to doing business contracts. Competition is indeed stiff and can be mud playing.

  36. If the discount-deals company is be based in another country so the money is being taken out of your own economy.
    many small businesses will end up paying less in tax because of the profits being eroded.
    The big corporate businesses such as Groupon with have top-notch accounts and pay less revenue (proportionately) than small businesses of there will be less tax for the government coffers.

  37. Pingback: Groupon vs. Google: Are Daily Deals Good for Business? | Verticalwerks

  38. Harris says:

    Groupon will be sued by a “merchant” customer in coming weeks in Illinois federal court, so we’ll see how well their merchant agreement holds up. This will be the first time a merchant sues Groupon. I hear they tried working out a resolution with Groupon first, but Groupon was so arrogant and uncooperative the merchant (defendant) is moving forward with their suit. Merchant customer is located in Cincinnati, Ohio…some home improvement website. Anyone hearing this?

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  40. Thanks for sharing this information. Unfortunately I’m sure that this won’t be the last time we discover a lopsided merchant agreement in this sector.

  41. Pingback: Is Groupon the Biggest Ponzi Scheme the World Has Even Known? | marclefton.com

  42. Internet Marketing is best know for having the upper hand for the person who owns the site. Think about all those profit sharing sites that they’ll give you 4% of every dollar you make. You really won’t get much money if you are only making a few bucks. Anyway…what’s a groupon?

  43. Groupon will be charged by a “merchant” buyer in arriving months in Il government courtroom, so we’ll see how well their business understanding supports up. This will be initially a business sues Groupon. I listen to they tried performing out a solution with Groupon first, but Groupon was so conceited and uncooperative the business (defendant) is dancing with their fit. Merchant buyer is found in Cincinnati, Ohio…some do it yourself internet site. Anyone experiencing this? http://www.zyy.com

  44. Groupon does take advantage of small business owners. There are so many better ways that businesses could grow their sales, while staying in full control. They could achieve a much better results on their marketing spend by utilizing local online marketing strategies. Not only would they be able to cut their costs, but they would also be able to measure their return on investment.

  45. reno says:

    Wow I never thought about group on in this way. I did not know that it affected small business in this way. Better get someone from the bookkeeping services.

  46. Pingback: Groupon, LivingSocial and daily deals – merchant FAQ « reDesign

  47. Pingback: A 1-star review of Yelp’s advertiser agreement | VentureBeat

  48. Thanks for sharing this great information. Really helpful.

  49. Groupon does take advantage of small business owners. There are so many better ways that businesses could grow their sales, while staying in full control. They could achieve a much better results on their marketing spend by utilizing local online marketing strategies. Not only would they be able to cut their costs, but they would also be able to measure their return on investment.

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  54. Ron says:

    Whey the hell did groupon send me two items. They are billed to me but I did not order them…Please let it be know! If this shit is missing. I am not responsible for it. I have No credit card – Idid not order it and it’s at a former location on the porch , where anyone can get to! What a joke this co. is Do not try and charge me for anything that I did not order (Which) is NOTHING!!!!!!!!!!!!

  55. Ken says:

    I am a merchant that deals with Groupon on a national level. I need to sue them for breach of contract. Do you know of any aggressive attorneys that I can contact?

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