Groupon Was “The Single Worst Decision I Have Ever Made As A Business Owner”

Posted: 09 Jun 2011 10:31 PM PDT

Editor’s note:This guest post was written by Rocky Agrawal, an entrepreneur who has worked on local products since 1995.  He blogs at reDesign and Tweets @rakeshlobster.

“How much is your average sale here?”

“It’s about five dollars.”

That one question told me Jessie Burke had been sold an unsuitable product. Her average sale was $5 and her Groupon rep had convinced her to run a Groupon for $13.

I already knew how the story ended. Jessie had posted about her experience running a Groupon for Posies Cafe on her blog. She calls running a Groupon “the single worst decision I have ever made as a business owner thus far.” You can read the story in Jessie’s own words.

I wanted to drill deeper and get at the why. I sat with her for an extended conversation. This is only one business owner’s experience, but it is a story worth retelling.

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

Some of the key takeaways:

1. Jessie found about Groupon from a friend who saw that the pizza place across the street was full after running a Groupon. Seeing that “success”, she wanted to give it a try.
2. There is very little information on which merchants can make decisions. Merchants are primarily reliant on the information and recommendations of the sales reps, which can often conflict with the business’ best interest. In a conversation with Groupon CEO Andrew Mason after her blog post went viral, she said “This isn’t a newspaper ad where most people know how to do that. You’ve revolutionized marketing. So nobody knows the parameters unless you tell them. No one told me the parameters.”
3. The sales process seemed like buying a car. Initially, the rep asked for 100% of the revenue. He eventually “settled” for 50% “Understanding that your business is newer, I decided to split the revenue with you,” he wrote. At one point, Jessie was told that she could only ever run one Groupon over the life of the business.
4. Tracking and infrastructure was a really difficult problem. At the time, she didn’t have a computer, so she was reliant on a binder with 900 names in it. It was an inefficient way to track the deal. This also resulted in a lot of fraud as people redeemed coupons multiple times.
5. Groupon controls scheduling of deals, which in this case turned out to be bad for her. Deals are scheduled based on factors that optimize the deal for Groupon, not the merchant. Her deal launched the weekend that the neighborhood library opened. It was the opposite of yield management. She got more traffic when she least needed it. Between the two events, there was a line out the door the whole weekend.
6. The customers she attracted weren’t likely to be regulars. One customer tried to use three Groupons at once. “What are you going to get for $39? Do you want the whole shop? And they were really offended.” “Most people took a trek here. This is definitely a neighborhood shop. People don’t come here from other parts of town just to get coffee.”  Some were abusive to staff and didn’t tip.
7. Most customers didn’t spend much more than the deal value. Groupon told her that something like 98% spent more than the value of the Groupon. “You think maybe like $5 above the value, not like 10 cents.” It’s in Groupon’s interests to make the deal value as high as possible because they get a cut of that. They don’t get a cut of anything extra that someone spends at the business.
8. There was minimal training on what to expect. Groupon sent her a link to a video. There was no explanation of how to handle things like expired coupons. “The onus of responsibility shouldn’t be entirely on this little business that doesn’t know the laws in the first place.”
9. Jessie didn’t do anything to convert Groupon customers into regulars, like asking them to follow her on Twitter or Facebook.
10. She would like to see more transparency. “I think it’s helpful for people to know that you’re not actually giving someone $6, you’re giving someone $3 in our case.”
11. Her Yelp ratings sank after the Groupon as Groupon customers complained about the business.

One of the things I’ve really struggled with in writing this is the potential for readers to view Jessie as ignorant or worse by the Silicon Valley elite. “She doesn’t know what an open rate is? Or what yield management is? Moron.”

That couldn’t be farther from the truth. From our conversation, I could tell that she’s clearly sharp. She shared an email she sent to Mason suggesting ways that he could improve Groupon and her suggestions were on the mark.  Her online presence, including a blog, Facebook and Twitter is well above average for a local business. She’s even claimed her Facebook Places page and is running a Facebook Deal, which is relatively rare.

She tried reading through Groupon’s merchant agreement, but it had too much legalese for her to understand.

Jessie says she tried to do research on other people’s experiences, but there wasn’t much on the Web. (Which is why she wrote the blog post.)

Since she wrote the post, she’s heard from other businesses who have had similar experiences. “What was the saddest part of it for me was that this had had happened to a lot of businesses but because no one had ever said anything we all just assumed (and myself included) we just assumed we were bad business people. That we just didn’t know what we were doing. If everyone loves Groupon so much, we must be wrong.” She estimates that she lost $10,000 in hard costs. Other businesses she heard from claim far greater losses.

The Groupon experience has soured her on similar forms of marketing. “Our most successful advertising is through Facebook. And that’s free. Even offering deals through Facebook, which is also free.”

She gets calls regularly from companies trying to sell her on marketing, including LivingSocial and Google Offers.

A Groupon rep called last week. She suggested that he Google “Posies Cafe.” The rep responded a few hours later with, “A simple Google search showed that I’m an idiot. I’m really sorry.”

The pizza place across the street from Posies has now run a second Groupon. Something worked for them in a way that didn’t work for Posies. I left a message for the owner. If she calls me back, I’ll share her story. And if you’re a merchant who has run a deal and wants to share your story, email me at dailydeals@agrawals.org.