3 Reasons Why Groupon is Screwed

Shit just got straight up “Jack and the Beanstalk,” because a giant is about to die.

I first noticed that Groupon was in trouble by looking at my inbox. There has been a serious decline in the flood of email deals that the online coupon company usually sends me. I rarely buy any of them anyway, so I’m probably part of the problem, but it is still a little disconcerting that I won’t be getting $15 for $30 on helicopter sightseeing tours much longer.

Some might say it’s a little presumptuous or mean-spirited to put a toe tag on the former darling of digital discounting just yet, as the company is still scrambling to diversify — but in a sense, I’m just further along in my grieving process. The corresponding step in the Kübler-Ross “5 Stages of Grief” chart would be bargaining — I will give you eight dollars for three wigs, Groupon. No more! With Groupon’s stock price continually dropping (it closed at an abysmal all-time low of $2.69 on Monday, down from a one-time high of $29.52), the only relevant question in all of this is “why?” Why is Groupon dying?

In 2010, Groupon was on track to reach 1 billion in sales faster than any company ever. CEO Eric Mason declined to sell Groupon to Google for $6 billion. In 2011, it went public with revenues estimated in the $3-4 billion range. It will likely be a dead company in 2013, and it’s chief competitor, Living Social, shouldn’t be too far behind it. Several experts predicted this would happen, likening its business model to a “Ponzi scheme.” In the end, I can find three reasons why Groupon will no longer be selling me my yoga sessions and BBQ lunches.

1. Groupon was a terrible deal for most businesses.

Imagine you’re a company that makes … I don’t know … fresh bread. And your base cost to produce a loaf of bread was $1 expense of storefront, electricity, employees, etc… suddenly the cost of that bread is $2. And you’ve gotta make a living, so you sell that bread at $3. Now Groupon’s sales people come along and say, “Hey! Do a deal with us, and you’ll make a ton of money from a ton of new customers.”

So you agree to their terms, which are strict (allegedly, Groupon declines 7 out of every 8 deals offered by merchants), and you post a deal. Suddenly, your little bakery is flooded with 8,000 new orders for bread. That’s amazing, except you suddenly realize that your bakery can’t possibly fulfill that many orders. Service suffers, quality of products suffer, new and old customers are angry. On top of that, Groupon has forced you to sell your bread at $1.50 to make it an attractive deal, and they’re keeping half your profits. So not only are you losing money on every loaf of bread, but every additional loaf you make puts you one step closer to bankruptcy. Groupon is an amazing idea, but for many small businesses, it is too much to handle. And for Groupon, small businesses are the mainstay of their daily deals.

2. Businesses most in need of Groupon’s services are bad for Groupon

As mentioned, small businesses are Groupon’s lifeblood. Big businesses are big businesses because they don’t necessarily need Groupon’s promotions; they have their own established customer base. But small business are prone to failure, and as business writer Rakesh Agrawal points out, businesses on the verge of bankruptcy are the most likely to accept a Groupon deal. That sudden influx of cash can potentially save their business, but if it doesn’t, well, they were going to go out of business anyhow. So Groupon gets stuck with the check when a business that a thousand people bought services from no longer is around to honor those services.

3. The “Napster effect”

This is the biggest problem with the Groupon ideal: The “Napster effect” is that people don’t like to pay for things, much less “full price” for things. So many customers of Groupon (myself included) are only bargain hunters on the lookout for mega-savings. Once the mega-savings are gone, I’ll be damned if I’m going to be a long-term customer who pays regular price. I know I got a particular deal once, so I always want that particular deal. If I can’t have it, you can’t have my business. With Napster, as soon as people got a taste for free music, the days of the CD business model were over. Customers reached a happy medium with an iTunes style of business, but ask the record execs if they miss the good old days. Small businesses counting on repeat business at normal prices often experience a rude awakening when the customers don’t come back. And in a January 2012 survey, of more than half of 400 businesses surveyed who’d previously done a deal with Groupon, more than half said they would not be offering any sort of Groupon-esque “daily deal” in the ensuing six months. Everybody loses.

So as you can see, Groupon is a paper tiger, but in reality, much like real tigers, she’s fucked. A magic beanstalk of idealism and allegedly poor financial record-keeping allowed Andrew Mason to climb high, but in the end, Groupon is in the midst of a plummet from beyond the clouds, all the way down to the cold, hard dirt. Now we’re just waiting for the impact. And that’s a tumble no Internet giant can survive.