reDesign

June 8, 2012

Would Rocky Agrawal ever work for Groupon?

Filed under: daily deals, groupon — Rakesh Agrawal @ 1:00 pm

This post is an excerpt from a forthcoming book on Groupon.

It’s a question I’m asked quite often by friends, family, journalists and once by a Groupon employee.

Apparently, it’s plausible that I would. When I posted on April Fool’s Day that I was joining Groupon (a day after a scathing analysis of Groupon’s earnings restatement), quite a few people believed it. I had several reporters contact me to ask me for interviews on my new job.

What made it believable is that most of the post was actually true. Aside from the part about, um, actually joining Groupon:

  • I’ve spent my entire career in product management and business development. It’s my true passion.
  • I’ve also spent much of my career on local products.

My initial and ongoing motivation for writing about Groupon and LivingSocial (and increasingly, Yelp), is to help small businesses make better decisions. By analyzing these business models, I hoped that SMBs who do even the most basic due diligence could find resources that would help them make a better informed decision on how to spend their hard-earned dollars.

I was chatting with a VC the other day about how wave after wave of local sites have raped small businesses, promising internet magic but delivering dubious value.

As I’ve said repeatedly, Groupon is not always a terrible thing for merchants. There are some cases when it makes sense. (Yelp, on the other hand, is always a bad buy.) Some of Groupon’s newer products actually make sense for small businesses.

One thing that I’ve heard from several sources is that Andrew Mason actually cares about small businesses. When he hears that a deal has gone bad or that a business lost a lot of money on a Groupon, he pulls out the checkbook and tries to make it right. Not in the “please don’t sue us and run to the press” way, but because he genuinely wants to make it right. Even Jessie Burke of Posie’s Cafe told me this. (To date, the company has not allowed me to speak with Andrew Mason, so I can’t offer a personal assessment.)

Over the last year, I’ve been approached by a number of companies that are looking to tackle the local space, from startups to the giant internet companies, about joining their teams to help small businesses. If I thought a company had a credible plan for helping small businesses really use the power and efficiency of the Internet, I would consider joining them.

Even if that company were Groupon. I look toward the future, not the past.

But I would have to believe that Groupon genuinely wanted my input and I would have a role where I could drive products in a way that would work for small businesses. If it was just about silencing a vocal critic, that wouldn’t be interesting.

Joining Groupon would obviously carry a lot of brand risk for me. Based on my April Fool’s Day joke, I know how a lot of people would feel about it. Many were puzzled, some called me a traitor and many offered their congratulations.

My friend Dave wrote on my Facebook wall:

Congratulations but I have to say I’m a bit disappointed. Here’s why, businesses that build their empires based on questionable/unethical business practices that ruin other businesses (especially small and local) should not be rewarded later for changing their practices after they’ve been exposed. I’d rather they go belly up but short of that, I hope you can help them stop ruining SMBs.

My friend Walt wrote:

Wow! Rocky life is full of surprises – this is a big one! The are very fortunate to have you!

And J.T. wrote:

I recall a lot of us thinking that their best move would be to hire you when last we met.

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June 1, 2012

Groupon investors race for the exits as lockup ends

Filed under: daily deals, groupon — Rakesh Agrawal @ 2:12 pm

Groupon shares dropped to a new all-time low today as its lockup ended, releasing a torrent of new shares on to the market. Thirty minutes into the trading session, Groupon had already traded 75% of its average daily trading volume. This was Groupon’s third highest volume trading day. (Disclosure: I have various puts against Groupon.)

Groupon filed to go public a year ago tomorrow. Back then the New York Times estimated a $30 billion valuation for the company; today’s closing value was $6.3 billion. That’s about 80% off. It’s just barely higher than the $6 billion that Google reportedly offered for the company last year.

Public market investors have lost a Groupton on the stock, which is down 52% from its offering price and 63% from its first-day close.

Early insiders are still fine, of course. Groupon co-founder Eric Lefkofsky and his affiliated entities took nearly $400 million off the table well before the IPO. Even those who got in the last round of financing, such as Fidelity, T. Rowe Price and Andreesen Horowitz are up, at least for now. Those shares were purchased for approximately $7.90, split adjusted. At today’s close, that’s a 23% return.

For locked up shareholders, the timing of the lockup’s end couldn’t have been worse. It came shortly after Facebook’s IPO and on a day with bad macroeconomic news.

What’s ahead for Groupon

I have been following the company closely since the S-1 was filed; I’ve predicted that without substantial changes to its core business model, Groupon stock is going to zero.

The company is trying hard to diversify beyond its core daily deals business with forays into loyalty, travel, liquidation of unwanted merchandise, instant deals and, most recently, payments.

Groupon Now, once touted at what Groupon would have been from the beginning, has been an unmitigated failure. Although the company likes to say that Groupon Now sold 1.5 million Groupon vouchers, that’s roughly 1% of Groupons sold last year and likely a smaller portion of revenue. “In just one year Groupon Now! has hit a milestone that took the original Groupon deal platform 15 months to accomplish,” Dan Roarty, VP of Groupon Now! said in a press release. But once you reach a certain notability and are a multibillion dollar company, your success has to come much, much faster.  Tom Cruise took 18 years to make his first movie. If it took him another 16 years to make the second one, that would be a failure.

To be fair, Groupon’s other businesses don’t have the structural problems that Groupon’s daily deals product has. They aren’t toxic for merchants. But they also aren’t gigantic profitable businesses. Here is my quick handicapping of the new product lines:

  • Getaways – Highly competitive business, with margins in the 20-30% range (vs. 40-60% in the daily deals business). The quality of Groupon’s offerings have been lackluster. I had my own terrible experience with Groupon Getaways.
  • Goods – Margin competitive business. Groupon doesn’t have the logistics capabilities of Amazon or the ad distribution power of Google.
  • Now! – Low volume, forces a change in consumer and merchant behavior. LivingSocial abandoned its product in the space.
  • Rewards – Trying to change consumer and merchant behavior too much. Structural flaws in the product.
  • Payments – This is a potential opportunity for Groupon, but is incredibly competitive. Not only is Groupon comepting with Square, PayPal and Verifone, there are hundreds of independent sales organizations that target this space. Groupon would have to tremendous volume to succeed in this space at the prices they’ve put forth.

With the exception of Goods, I don’t see any of these businesses being material to Groupon’s revenues in the next 12 to 18 months.

At a town hall meeting with employees, Groupon’s Andrew Mason reportedly said, “We’re still this toddler in a grown man’s body in many ways.”

And like a toddler, Groupon is sticking its hands everywhere; it has no idea what it wants to be when it grows up. Here’s a partial list of the companies and brands that Groupon is trying to compete with: LivingSocial, Amazon, Google, Expedia, Priceline, Hotwire, PayPal, Square, Verifone, American Express, Visa, MasterCard, Fab, Woot, Facebook, OpenTable, Mindbody Online, Envision Salon, First Data, Costco, every newspaper, every Yellow Pages.

Groupon’s investors were counting on the kind of stratospheric growth that the company was experiencing before its IPO to propel its stock price. So far, the trajectory has all been downward.

April 22, 2012

Weekly Reader: Facebook virality, Twitter patents and Groupon’s Lefkofsky

Filed under: daily deals, facebook, groupon, twitter — Rakesh Agrawal @ 8:46 am

This contains a summary of my work this week. I had two very important non-Groupon stories this week, on Facebook and Twitter.

My work

Secrets of Facebook’s success: Virality — Facebook’s photo tagging feature was an important driver of its growth. Traditional marketing approaches aren’t as effective as products that are designed to take advantage of the social nature of people. Google+ misses the basics. While Google spends millions running beautiful Oscar ads, they ignore very basics of product design necessary for social interaction.

Can Twitter and Yammer fix our broken patent system? – Twitter announced a new agreement with its employees that Twitter will only use patents for defensive purposes and will not become a patent troll. Employees who invent for Twitter will have a say in how Twitter can use the patents. As an inventor, this has a lot of appeal. Could this be a sign of more sanity in patent battles?

Chicago Tribune talks to Groupon chairman Lefkofsky; asks the wrong questions – A Chicago Tribune business columnist sat down for an extended interview with Groupon chairman Eric Lefkofsky and failed to ask the hard questions, such as: Why did you take so much money off the table pre-IPO? How is it that you made so much money on previous companies and investors were left holding the bag.

“It just works” rules – I’m launch a new feature on VentureBeat where I’ll be taking a look at brilliantly designed products. My goal is not to traditional product reviews, but to help product people learn from great design. Do you have a product that fits my criteria? Shoot me an email.

Staying connected with friends for frequent travelers – For someone who travels as much as I do, staying in touch with friends can be a challenge. Here’s a strategy I came up with.

Other interesting nuggets

The Perils of the Daily Deal Customer – A first person account from a merchant on her daily deal experience. The merchant’s experience is exactly the result I expect from the economic model of the daily deal. At their core, daily deals create unserviceable demand from untargeted customers at massive discounts.

I just finished the final hellish weeks of a Groupon deal I ran a year ago. I’ll probably never do one again. If enough merchants grow to feel the way I do — and many already do — Groupon and its countless imitators will wither and die because they will not be able to get enough businesses to participate in the deals you so enjoy.

Why aren’t we going back for more? Because daily deal customers are worse than normal customers in every way imaginable.

April 11, 2012

Another open letter to Andrew Mason

Filed under: daily deals, groupon — Rakesh Agrawal @ 4:35 pm

Dear Andrew:

As you may have heard, I am coming back to Chicago in the next couple of weeks for another round of Groupon research. Although you didn’t take me up on my invitation the last time I visited Chicago, I’d like to encourage you to re-consider this time.

Since I started writing about Groupon last June, I’ve been right about most things. Here are some of my predictions that have come true:

  • Groupon would have to abandon ACSOI.
  • Groupon would have to use net accounting instead of gross accounting.
  • Groupon Getaways wouldn’t be meaningful.
  • Groupon Now wouldn’t be meaningful.
  • Consumers would fatigue of daily deals.
  • The deal quality would go down as better merchants figured out that running Groupons is a  bad idea.
  • The Groupon Promise would turn out to be too expensive. During my last visit, I very explicitly told your PR team that they were underestimating the refund rate. This, as we know, was the cause of your restatement that has sent the stock into freefall.

I’m happy to chat with you about the current state of Groupon and the steps that management is taking to fix these problems.

There are a few other reasons you should consider meeting with me:

  • I will be meeting with current and former Groupon employees during my trip. I can only spend so much time in Chicago, so any time I spend with you is time that I’m not talking to employees.
  • I talk to most reporters who cover Groupon. Because I have spent more time than nearly anyone studying the space, I give background information to many others who are looking to learn and write about it.
  • I talk to money managers about Groupon and the local space. Before the IPO, I talked to many money managers about the offering. Most everyone I talked to listened to what I had to say and didn’t buy at the offering. (And they’re now very thankful — considering that the stock is down 35% in less than 6 months.) If there’s a better story to tell for the future, I’m sure they’d love to know.

And, who knows, after meeting, we may decide that my April Fool’s joke isn’t such a bad idea.

April 7, 2012

Look at the logo Google News puts next to Groupon

Filed under: daily deals, groupon — Rakesh Agrawal @ 9:49 am

From this morning, a search on Groupon returned these results:

Google News algorithms put the Enron logo next to a story about Groupon

Google News algorithms put the Enron logo next to a story about Groupon

I think I’ve made the Groupon and Enron comparison myself. In both cases, you had high-flying companies that focused on short-term growth while ignoring the underlying risks of what they were creating.

One of the challenges of negative press like this is that Groupon is dependent on cash flow from selling new deals to pay off merchants from old deals.

The right way to think about Groupon is as a currency. Such constant bad press could create a confidence crisis in the Groupon currency. Small businesses who do the most basic due diligence (Google “Groupon”) will see the negative news and refuse to run new deals. It will exacerbate Groupon’s adverse selection problem, meaning only shakier and shakier businesses will run Groupons, increasing Groupon’s refund liabilities. (If you were on the bubble about running a Groupon, the bad press will sway you toward not running one.)

Consumers will also stop buying deals. It could also lead payment processors like Chase Paymentech and American Express to terminate their merchant relationships, which would also lead to cash-flow issues for Groupon.

If the Groupon currency market were as efficient as bond markets, this news would cause Groupon to collapse overnight like Lehman Brothers. Fortunately for Groupon, the market is not that efficient.

Groupon customers outside of the United States and Canada will also be hurt because Groupon generally holds on to their money until a Groupon is redeemed.

When Groupon collapses, it will cause some serious pain for Chase Paymentech and possibly American Express. I estimate that Chase has at least $500 million in chargeback liabilities if Groupon goes under. But because Groupon doesn’t accurately track which Groupons were redeemed, this liability could be much higher. Any consumer who had purchased a Groupon could claim they didn’t get what they paid for. I called on credit card companies to take a look at their exposure from Groupon months ago in a Bloomberg West appearance.

The biggest losers in a Groupon collapse would be the small businesses who run Groupons. As of the end of the 4th quarter, Groupon owed small businesses $520 million. This number is likely at least $100 million higher. These are people who can hardly afford to take a hit of several thousand dollars.

The other potential loser is Ernst & Young, the auditor that signed off on revision after revision of Groupon’s bogus financial statements. (Though I don’t expect Groupon to take down Ernst & Young like Enron took down Arthur Andersen.) I’m not ordinarily one to call for Congressional hearings, but E&Y deserves to be raked over the coals for sanctioning Groupon’s financials.

Oh, and a note to the Los Angeles Times: I fully expected this.

See my worst-case scenario of what happens if Groupon collapses. Also see my collection of Groupon stories following the restatement.

Disclosure: I have investments and several ongoing bets related to Groupon.

April 4, 2012

Are LivingSocial, Google Offers and the rest as bad as Groupon?

Filed under: daily deals, google, groupon, livingsocial — Rakesh Agrawal @ 6:27 am

IMPORTANT: Please see this page to see my current interests in Groupon.

Whenever I get into Groupon mode, people ask me about how LivingSocial and Google Offers are different from Groupon.

In many ways, they are the same. Any model that gives businesses cash early on in exchange for a promise of service to be delivered later is a financing business, not a marketing business. I use the analogy of receivables factoring or payday lending to describe the core U.S. Groupon business model. That also applies to LivingSocial’s and Google Offers’ daily deals product. Whenever you do that, you have a risk management issue. And I believe that no one in the space is handling the risk appropriately.

As a point of comparison, I tried one of my fraud tests against Square. About $11 in transactions that fit a pattern of potential fraud were enough to get my account shut down. Yet Groupon and LivingSocial are writing checks for tens of thousands with very little fraud prevention.

But there are some very significant differences among the players in the space:

  • Scale. Groupon has the most scale by far. On a revenue basis, they are roughly 4x as large as LivingSocial, the #2 player.
  • Management team. Groupon co-founder and executive chairman Eric Lefkofsky has a checkered past with his previous companies. The pattern is the same: he gets rich and investors lose. This CNN article is a must read for anyone interested in Groupon. Lefkofsky and his affiliated entities took nearly $400 million out of Groupon before the company went public. I worked with LivingSocial CEO Tim O’Shaughnessy during my time at Aol (although not closely). There was nothing in my interactions with him that suggested anything sketchy. He just struck me as an ambitious and energetic guy. It’s hard for me to believe that a $10 billion public company has a PR team as grossly incompetent as Groupon’s. LivingSocial’s is among the best I’ve ever worked with. (Disclosure: I worked with LivingSocial’s head of PR at Aol. He was the PR lead on one project I worked on. Groupon refuses to talk to me.)
  • Company structure. Groupon is an independent public company, which means its moves are analyzed differently than LivingSocial’s (which is private) and Google Offers (which is too small to be material in Google’s results). This means they have to act very differently. Even if Andrew Mason agreed 100% with everything I’ve written, he might not be able to take corrective action because most of the necessary steps would require short-term revenue declines. LivingSocial, on the other hand, can do away with underperforming products like LivingSocial Instant. Because Offers is a tiny part of Google’s business, they can afford to build for the long term and do the right thing for small businesses as opposed to trying to extract as much money as possible now to satisfy Wall Street.
  • Innovation. Although LivingSocial essentially ripped off Groupon’s business model, it has been much more innovative since. As a smaller company that is not subject to Wall Street pressures yet, it is able to try a lot of new businesses and see what works. This flexibility may be what saves LivingSocial while Groupon has to double down on a stupid business model to show revenue growth.
  • A different focus. Groupon has set its brand to be all about price, which attracts the wrong set of customers for small businesses. Businesses want high-value customers, not cheapskates who will never return at full price. Just the brand names make a difference: Groupon sounds cheap; LivingSocial almost sounds classy. This may sound like a cheap shot, but I believe it makes a meaningful difference.
  • Risk mitigation. LivingSocial has sales people on the ground in most of its markets. They actually visit the businesses and talk with business owners. Groupon has a lot of people in call centers in Chicago. Although LivingSocial has had its share of deals that go bad, having feet on the street is an important risk mitigation function. In theory, LivingSocial sales people can see if a business is shoddy or has gaping flaws that would turn off customers. I’m sure they’re not trained to evaluate risk as someone who knew they were in the receivables financing business would be, but it’s better than nothing. There are also structural differences: by being in market, LivingSocial salespeople don’t have as much incentive to screw over small businesses because they may have to revisit them. Groupon, with its call centers, creates bad incentives because sales people screw over businesses in smaller markets in order to get promoted into bigger markets where they get promoted.
  • Groupon Promise. The Groupon Promise is the proximate cause of Groupon’s earnings re-statement on Friday. (There are others, but I’m simplifying.) LivingSocial and other players have not had anything like it. This creates a lot of overhang for Groupon in that they’re unconditionally backing the performance of small businesses over whom they have little control. It also opens Groupon up to refund abuse by consumers who just take advantage of the promise. As a consumer value proposition, it sounds great. But it creates a lot of risk for the business financially. It also creates legal and regulatory risk if they don’t live up to that promise.

March 31, 2012

Why Groupon is poised for collapse — an update

Filed under: daily deals, groupon — Rakesh Agrawal @ 6:39 am

Groupon was forced to restate fourth quarter earnings, sending its stock down 6% in after-hours trading. This surprised me as much as my $2 investment in the Mega Millions jackpot not paying off.

The reasons for Groupon’s restatement were higher refund reserves and weakness in internal controls. These are issues I’ve repeatedly discussed. I raised them directly with Groupon PR in September (back when they still would speak to me) and I was assured that refunds weren’t an issue for Groupon.

I also spoke with a former Groupon salesperson who claimed he was fired because he raised concerns about poor internal systems that didn’t track deals correctly and complaints about poor risk management when it comes to running deals.

So what’s happening at the coupon company?

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

Another factor is that Groupon is selling bigger and bigger deals and many of these have requirements for use. Some deals have medical qualifications. The former salesperson told me about Groupons for a procedure called “cool sculpting”. In this procedure, fat is frozen off the body. In order to get the treatment, patients must be medically qualified. But Groupon has no way of medically qualifying purchasers and will sell it to anyone. When they go to the doctor and find out that they aren’t eligible, they call Groupon for a refund. If this is several months later, after Groupon has paid out the entirety of what it owes the provider, this can mean a refund loss for Groupon.

Travel is another risky category for Groupon. Unlike Expedia, Travelocity, Priceline, Jetsetter and nearly every other major travel provider, Groupon does not require consumers to pick their dates and confirm availability at the time of purchase. When a consumer finds he can’t use his Groupon months later, he calls for a refund. Groupon also hides material restrictions on travel deals, something I pointed out in September and Groupon still hasn’t rectified.

Because these are higher ticket items that cost hundreds or thousands of dollars, consumers are more likely to ask for a refund than on lower ticket items. In the short term, it means a revenue boost to Groupon, which the company needs as its once torrid growth itself cools. In the long term, it means refund losses.

The “Groupon Promise” is another risk factor. It’s an overly broad promise designed to allay consumers’ concern about using Groupons. Because it is so broad, it results in higher refund rates than would otherwise be the case.

Yet another concern is that Groupon does not track how much outstanding Groupon “debt” there is. There is no one in the world who can tell you how many and how much Groupon value is outstanding. Unlike typical gift card sales, Groupon books revenue immediately and then does not show the Groupons on its balance sheet. By my estimates, Groupon has between $500 million and $750 million in liabilities that it doesn’t show on its balance sheet.

In theory, Groupon’s exposure to that risk is covered by its refund reserves — but we don’t know the size of those reserves. And as yesterday’s restatement shows, they’ve calculated them poorly. Unless Groupon begins to do risk assessment on deals before they run, changes its payout terms to businesses or drastically changes its refund policies, I expect refund rates to continue to rise. If they do any of those things, I expect revenue declines because it will make running Groupons less attractive to businesses and buying Groupons less attractive to consumers.

Groupon has also worked hard to hide their refund rates. While going through their S-1 process last year, Groupon continually revised its accounting. At one point, I discovered a way to calculate their refund rates and found that refund rates had likely increased more than 40% year-over-year. In the next amendment to their S-1, they changed their accounting again to bury that data.

Investors should also be concerned about the fact that Groupon’s lock up should end in early May, releasing a lot more shares on to the market. I wouldn’t be surprised to see Groupon trading in single digits after that and heading to zero within the next 36 months. Groupon’s best bet is if they can acquire their way into a sustainable business model; I’m doubtful that will happen considering the companies they have purchased to date.

With its restatement, Groupon said that its guidance for the first quarter remained the same as earlier. Given that their lockup should end shortly before they report first quarter results, I would take that assessment with a mine full of salt.

See some of my previous writings on Groupon:

January 22, 2012

Groupon, LivingSocial and daily deals – consumer FAQ

Filed under: daily deals, groupon, livingsocial — Rakesh Agrawal @ 8:03 pm

Judging from the queries that come to this blog, there are a lot of questions that consumers have about daily deals from Groupon and LivingSocial. If you are a merchant and are interested in learning about the merchant experience, see the Groupon merchant FAQ. Please note that although I use “Groupon” extensively throughout this post, the same general principles apply to other U.S. deal sites, including LivingSocial

These are the most frequently asked questions about daily deals:

My Groupon expired. Is it still worth something?

Yes, Groupons and LivingSocial vouchers that expire are still worth what you paid for them forever. In some states, the merchant may be required to honor the full face value (including promotional discount) past the expiration date. You can try to use it at the merchant. If they won’t honor it, call up Groupon or LivingSocial and ask for a refund.

The business I bought a Groupon for went out of business. Can I get my money back?

Yes. Call the deal company and you will get a refund of the money that you paid. They may initially try to give it you in Groupon credit; insist on getting a refund to your credit card.

Do I have to use my Groupon all at once?

Many daily deals state that they must be used in one visit. However, this may be contrary to state law as some states require that prepaid vouchers can be used over the course of multiple visits. It’s still unclear how this will play out. But if you’re dissatisfied, call or email your deal provider and explain your situation. You can use vouchercomplaints.org to help craft your email and learn more about the specifics that apply to your state.

Can I get a cash refund for my unused Groupon value?

Some state require that any balances below a certain value be refunded in cash if requested. For example, in California, merchants are required to refund gift cards with value below $10 upon request. It’s still unclear how this will play out. But if you’re dissatisfied, call or email your deal provider and explain your situation. You can use vouchercomplaints.org to help craft your email and learn more about the specifics that apply to your state.

Will I get worse service if I use a Groupon?

It’s not uncommon to experience poor service when using a Groupon. This happens for two primary reasons: 1) Many businesses end up selling a lot more vouchers than they expected, leading to a crush of demand that they can’t service. You may want to wait until a month or so into the Groupon, when the initial rush dies down. 2) Many servers have bad experiences with Groupon customers. I’ve heard many complaints about poor tipping and customers being extra demanding. As a result, they treat all Groupon customers poorly.

I bought a Groupon for a cleaning service, but when I call they tell me that they can’t book me for 4 months. What can I do?

Because Groupon generates so much demand, it’s pretty common for service businesses like cleaners, spas and auto detailers to be booked up for months. If you can’t book in a timeframe that meets your needs, call Groupon and ask for a refund.

I bought a Groupon Getaways voucher. I tried to book my trip, but the hotel says it’s not available for Groupon use. I checked their Web site and they have rooms available. What’s going on?

Groupon Getaways and LivingSocial Escapes are generally sold based on “availability.” Availability doesn’t mean it’s valid if any room is available. Like airlines, hotels allocate rooms into multiple inventory buckets. In order for you to use your voucher, there must be availability in the bucket that corresponds to your voucher. Availability is always in flux; if you’re told that it’s not available today, it might be available tomorrow and vice versa. If you cannot book the dates that you want, call Groupon or LivingSocial and ask for a refund.

Are Groupons bad for businesses?

It depends on the type of business and the type of deal. In many cases, Groupons are harmful to the businesses that run them. This is especially true if you are an existing customer and use a Groupon when you otherwise would have paid full price. See the Groupon merchant FAQ for more information.

I have another problem with Groupon or LivingSocial that isn’t addressed here. Where can I get help?

You can email support@groupon.com or call their customer service at  1 (877) 788-7858, 9a.m.-5p.m. CT.

For LivingSocial, visit http://help.livingsocial.com/contact_us or call 877-521-4191.

Although I usually hear negative things from merchants about daily deal companies, I generally hear very positive things from consumers about customer service.

If they aren’t able or willing to help, try calling your credit card company and requesting a chargeback.

If you have an interesting situation or a negative experience with their customer service, feel free to also email me at dailydeals@agrawals.org. Because of the volume of email I get, I can’t respond to every message.

You can also leave a comment on this post.

January 21, 2012

Groupon, LivingSocial and daily deals – merchant FAQ

Filed under: daily deals, groupon, livingsocial — Rakesh Agrawal @ 6:36 pm

Judging from the queries that come to this blog, there are a lot of questions that merchants have about daily deals from Groupon and LivingSocial. If you are a consumer and are interested in learning about the consumer experience, see the Groupon consumer FAQ.

These are the most frequently asked questions about daily deals:

Does it make sense for a small business to run a Groupon or LivingSocial deal?

In many cases, it does not make sense. For most of the cases I see with small businesses, I would advise against it. It is especially bad for restaurants, bars, spas and other service businesses. It’s possible to make daily deals work — if you are very careful about the construction of the deal. You want to try to ensure that people spend more than the value of the voucher. You also want to try to get people to come back. See my list of Groupon and LivingSocial best practices for guidance on how to negotiate and prepare for your deal.

In what cases does it make sense to run a Groupon?

The absolute best time to run a Groupon is if your business is about to go out of business. In the United States and Canada, Groupon and LivingSocial provide cash upfront. This might help your business get over the hump. Because they don’t do background checks, you can run a Groupon even if you can’t get a loan from the bank.

How big a cut do the daily deal companies take?

Typically, they take 50% of the value of the deal. If, for example, you sell $50 worth of product for $25, you will receive $12.50. The commission rate varies. I’ve seen it as high as 100% and as low as 10%.

Is the fee negotiable?

Yes. You can negotiate the terms with your sales rep. If you business is well known within the community or you have a unique product offering, there’s a reasonable chance that you can negotiate an 85% or 90% share.

Do I control when the Groupon runs?

No. Groupon typically runs a deal when it thinks it will be most profitable for them. You might only get a few days notice before your deal runs. Do not believe any assurances that your sales rep gives you about when he expects it might run. If it’s not in writing, it’s not a commitment.

What is the biggest risk in running a Groupon?

For many businesses, the biggest risk is that the customers who come in are already your customers. Instead of acquiring new customers, you will end up taking a loss on your existing customers who would have come in anyway at full price. Plus, I hear more stories lately from consumers who choose not to go back to their favorite restaurants for several weeks after a Groupon runs because they don’t want to deal with the Groupon people.

Running a Groupon can also lower your Yelp ranking in a way that might be hard to fix. This can have a long-term negative effect on your business because many people rely on Yelp reviews to decide where to go.

Is Groupon really no risk advertising?

No. The best way to think of Groupon is “no money down” advertising. Instead of paying for ads upfront as you would with a newspaper or magazine ad, you pay for it in the form of large discounts and fees over time. I talk to many businesses who lose tens of thousands of dollars running Groupons. With a newspaper or magazine ad or Yelp subscription, the most you can lose is the price of the ad.

Can I cap the number of deals sold?

Yes. It is absolutely essential to set a maximum number of deals sold. It’s not in Groupon or LivingSocial’s short-term interest to cap it because they make more money if they sell more deals. Insist on a cap and make sure it is in your contract. I’ve heard from former deal sales people that they would lowball the number of deals that they estimated so as not to scare merchants. For example, if they expected a deal to sell 1,200, they would tell the merchant it would only sell 300 so that the merchant would run the deal without a cap.

Will Groupon or LivingSocial give me the email addresses of the people who come in?

No, Groupon and LivingSocial do not provide email addresses, phone numbers or other contact information for customers. To maximize the effectiveness of your deal, you should ask each customer for their email address. This will give you the opportunity to re-market to them. Be sure to train all of your staff to ask for this.

What does a daily deal contract look like?

See:

I signed a deal agreement three months ago, but my deal hasn’t run. What can I do?

In the agreements I’ve seen, there is nothing you can do. The deal company has total discretion over when a deal runs. They can also choose never to run the deal.

I changed my mind. Can I get out of my contract?

In the agreements I’ve seen, merchants cannot break the agreement. If I were in this situation, I would consider telling my sales rep that I will not honor any deals that come in if they run the deal. The deal company is typically on the hook for refunds, so this may get them to choose not to run it. (See the comments section on this post for a business that took this approach.)

My Groupon ran already, but I’m fed up with Groupon customers. What can I do?

Some businesses choose not to honor any more Groupons and tell customers to call Groupon for a refund. In theory, Groupon could sue you. But I haven’t seen it happen yet. Regardless, I would honor any Groupons from my existing, loyal customers.

Am I responsible for honoring expired Groupons?

Technically, according to current terms and conditions, you are responsible for honoring the original price paid for the Groupon for eternity. Legally, you may be required to honor the full value (including the discount) depending on your state. In practice, Groupon and LivingSocial will issue refunds to customers who complain. I might encourage consumers who aren’t regulars to call the deal company and ask for a refund.

Has Groupon sued a merchant?

I don’t know of any cases where Groupon has filed suit against a merchant. If Groupon is threatening to file suit against you, please email me at dailydeals@agrawals.org.

Why do you hate Groupon so much?

In its current state, Groupon is selling its product in a fundamentally dishonest way and is ripping off many small businesses. While it’s certainly true that Groupons can work under the optimal circumstances, many of the deals I see are bad for businesses. If Groupon changes its business practices and does a better job of taking into account the needs of small businesses, I will happily say so.

If you have other questions, you can email me at dailydeals@agrawals.org. I’m always interested in hearing from merchants about experiences, both good and bad. Due to the volume of mail I receive, I can’t respond to everyone. But I do read every message.

December 14, 2011

PayPal to try to compete with Groupon, but will it matter?

Filed under: daily deals, groupon — Rakesh Agrawal @ 9:41 pm

PayPal is preparing to launch a Groupon competitor in the first  quarter of 2012, according to Bloomberg. The eBay subsidiary hopes to tap into its base of 103 million accountholders.

From what I’ve seen so far, this doesn’t seem like a credible competitor. The daily deals business doesn’t play to PayPal’s strengths. If it tries to compete with Groupon on Groupon’s terms, it will lose.

Among the challenges:

  1. Daily deals are sold,  not bought. Groupon and LivingSocial have built small armies of salespeople not because they want to, but because they have to. Self serve for small businesses hasn’t worked — even when Groupon has tried it with Groupon Stores and Groupon Now. PayPal would have to build a similar army. Self serve will happen eventually, but not in the next couple of years.
  2. Customer service is not PayPal’s strength. Groupon and LivingSocial have made great customer service (for consumers) a hallmark of their products. PayPal’s reputation with consumers and merchants has a lot of room for improvement.
  3. PayPal has historically been risk averse. Groupon is taking on way too much risk in their business model. But PayPal will likely take on too little risk, making the offer unattractive for both consumers and merchants.

This is not to say that PayPal’s entry won’t hurt Groupon. The biggest area for concern is the pressure that PayPal will put on the revenue share that Groupon gets for deals. This has already dropped dramatically — from 42 percent in 2Q to 37 percent in 3Q.

PayPal (like credit card companies) has built its business on taking small amounts of money from lots of people; Groupon has built its business on taking large amounts of money from few people.

For its payment services, PayPal charges about 3% of the transaction amount. If PayPal offers deals for 10% or even 20%, that will put a lot of pressure on Groupon. That’s especially true for large national, online and retail deals.

One strength that PayPal has is its acquisition of Where earlier this year. Where gives the company a strong mobile team, a mobile ad network and a mobile user base that had 4 million monthly active unique users at the time the acquisition was announced.

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