The Groupon/Coupon Bubble Will Burst Soon

I posted the above status update earlier today, and when asked to explain myself on Facebook, I wrote up a rather lengthy explanation that seemed worth of turning into a blog post…so here it is (slightly edited for clarity).

I’ve talked to a few small businesses now that have used these new coupon services, and in every case so far, they’ve been financially maimed by them. Some due to their own ignorance or poor financial understanding, some by the salespeople at the deal companies.

A carpet cleaning company used Kijiji and the salespeople wouldn’t allow him to put a limit on the number of coupons sold – because they wanted to gain as much revenue as possible from it of course. They charge 50%, like everyone seems to, and still tacked on another 2.5% in credit card processing fees. Talk about adding insult to injury. Thankfully for him, only 150 people ordered the carpet cleaning – he was smart enough to spread out the appointments, only booking the Kijiji deals three times a week. That makes it frustrating for customers like me to get the service in a timely fashion – it took two months for me to get my booking in – but given that he’s working at 77.5% off his normal price, he’s only breaking even on supplies and travel costs…so his labour is free. Hard to feed a family on that!

In my case he made some money – I had him do two sets of stairs, which weren’t a part of the deal – but he said nearly every time people only want what the coupon covers. So as soon as he hits 500 square feet of carpet cleaned, he stopped.

Most businesses hope for repeat customers, but the type of customers that use deals like these are usually the kind who aren’t willing to pay for a service at full price in the first place. So you end up with people using your service at no profit to you, and you don’t get many new customers out of the deal. There are some exceptions: the guy that did our carpets did such an amazing job I’ll absolutely use him again, paying full price and b happy about it. I think that’s rare though.

Some deals can scale, no matter how many coupons are sold. I just bought a $10 for $20 at Old Navy for example. Old Navy could sell 10,000 of them and their stores could handle the extra traffic just fine. But the small carpet cleaning business, if he suddenly has 500% more clients than before, it soaks up all his excess capacity (good) but also uses up all his future capacity for the next six months (bad), at no profit. I heard of a cleaning company that went bankrupt because they sold too many coupons – again, because the company wouldn’t let them restrict the number of coupons sold – and it was easier to go bankrupt than to absorb the losses of the poor business decision of using the coupon service.

  • We used our first Groupon coupon ever this week. It was for a Toronto restaurant that has maybe 2-3 locations.  First, I goofed an thought I bought it for their downtown location, but it turned out to be their west end location.  Still downtown, but in a bit of a seedy area.  The coupon was about to expire, so they would have been all the way through the batch by now.

    As we walked up to the place, I said “Well, this will be one of those Groupon failures.  I’m never coming back here”.

    After experiencing wonderful service, no crap about the coupon, and great food, I think I will probably make it back to that location, occasionally.  But most likely I will make it to their downtown location.  Is that a fail?  A half fail?  Or is it a win?  I was so happy to find another quirky, good music, veggie-friendly place to eat that it was definitely a win for me.

  • Glad to hear you had a good experience! I’ve had some good experiences with restaurant-based coupons as well – most places can handle the extra business – and wouldn’t hesitate to buy them again. The bigger problem seems to be services that are more restricted in terms of throughput…spas, massages, cleaning services, etc. I used to buy the coupon, then wait a month or more before using it – thinking that the rush would have died down by then. Now I’ve learned my lesson after being burned: I phone first thing on the first day the coupon is being honoured.