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Groupon: A Grimm Tale

Do you remember the story of Little Red Riding Hood?

A little girl is told to go directly to her grandmother’s house to deliver some baked goods, but she decides to dawdle along the way, where she meets a wolf who discovers her good intentions. The wolf spots an opportunity, so he hurries to the grandmother’s house, eats the grandmother, disguises himself in the grandmother’s clothing, and then lies in wait to deceive Little Red Riding Hood long enough to gain her trust…and then eat her too.

Fortunately, this fairy tale has a happy ending: the girl and her grandmother are rescued from the wolf’s stomach by a passing hunter, who then slays the deceptively cunning wolf.

Also, like every good fairy tale, the story of Little Red Riding Hood has a moral, but I’m going to save that until the end of the post. First, let’s talk about Groupon.

How Groupon Works for Consumers

Here’s a quick video overview of how Groupon works for the average consumer:

 

It’s pretty simple – you sign up for the service, after which you will receive a daily deal for a local business in your area. Groupon claims deals typically offer a 50-90% discount on a product or service from a local business. If enough people decide to purchase the deal, then it “activates” and you can subsequently redeem it.

So, at this point, you may be thinking, “This seems like a really good idea – I get a discount, the local business gets new customers, and everybody’s happy – where’s the fairy tale connection?”  Great question. If this were the whole story, I would agree…unfortunately there’s a also dark side to this story that few people ever see.

A Brief History of Groupon

Daily deals sites like Groupon were born during the great recession (whether this is just a coincidence or not is for you to decide). In this environment of consumers worried about their budgets and cash-strapped small businesses, daily deal sites flourished. Groupon was dubbed as one of the fastest-growing company on a revenue basis in American history.

How did they do it?

Groupon and Small Business

How Groupon is supposed to work for small businesses:

The small biz offers a significant discount on a product or service, and then Groupon will distribute the deal to its’ network of subscribers in exchange for a percentage of the revenue. Let’s use a massage as a best case scenario example:

  • Normal Price: $80
  • Deal Price: $40 (50% off – the Groupon minimum)
  • Revenue Split: 50/50 (could be lower for small biz)
  • Groupon’s Share: $20
  • Local Biz Share: $20

Simple math tells us that the local business is only going to get paid 25% of their normal price for a massage. This is obviously a pretty steep discount, but the idea is that if these are new customers, and you can get them to become repeat customers who will come back multiple times for massages at full price, the discount is worth it.

But wait, there’s a catch…

Groupon doesn’t give the small business their share of the revenue right away – they split it into three payments. The small business gets 33% in 5 days, another 33% in 30 days and the remainder in 60 days. So not only are they giving a deeply discounted product or service, but they are doing so with no cash flow.

The Big Bad Wolf

Time to get back to the moral of the fairy tale. In this case, the moral looks a little different depending on whether you’re a consumer or a small business. If you’re a consumer, you need to realize that you’re essentially feeding the wolf when you buy these deals. The moral for small businesses is a little more obvious: beware the wolf in grandma’s clothing. When the voice, the ears, the teeth, and the fur don’t look like grandma, you should probably stay far away (except in these 6 cases).

What’s really under Grandmas’ clothes:

Meet a Modern Day Little Red Riding Hood: (read her story here)

Part 1 – Part 2 – Part 3 – Part 4 – Part 5

 

UPDATE: Social Media Class Presentation

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