It’s rare to hear a business model described as “evil,” but Groupon has achieved this infamy with many small businesses for what they claim are large cuts to their profits and lack of concern for their interests. In this article, we break down the essence of Groupon’s policy and explain why their merchant partners can’t be satisfied.

Grabbing Groupon

Launched in 2008, Groupon capitalized on the economic recession to offer their solution for fast, easy cash flow. As Rocky Agrawal for TechCrunch reports, “Businesses are being sold incredibly expensive advertising campaigns that are disguised as ‘no risk’ ways to acquire new customers.” The prospect of driving traffic in the door is appealing to a small business that isn’t doing too well or one that is just starting to gain a following.

Things to Be Aware of:

Huge Loss of Profit

The core of the Groupon deal is this: The business takes 50% of the profit off the product, Groupon takes 50% of the remaining amount, and the business is left with 25% of the original profit from that product. To keep it fair to the business, Groupon claims to cap the number of deals that can be redeemed. Once that number is reached, the price should go back to normal. Apparently, however, with Groupon this doesn’t always happen, and the business must instead contact them to sever the deal.  Many businesses will find themselves with a larger margin of loss after a Groupon deal, and use a subsequent deal to make up for it. Agrawal states, “Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business.” As with any other loan, don’t take it unless you can afford to pay it back or make it back up.

Risk Factor

“With a newspaper ad, the maximum you can lose is the amount you paid for the ad. With Groupon, your potential losses can increase with every Groupon customer who walks through the door and put the existence of your business at risk.” Jesse Burke, owner of Portland’s Posie’s Cafe, writes in her blog, “There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign...It was sickening, especially after our sales had been rising. Sure, maybe thinking of it as just marketing may seem justified, but anyone that knows me well knows that I would never pay more than $100 for advertising, much less $8,000.” The story of Burke’s Groupon experience, which went viral and was subsequently featured by Business Insider, is not an isolated incident. Many small businesses have written about and spoken on their dissatisfaction with the company.

Disinter-mediation of Customers

A business that is invested in advertising obviously wants to build a good relationship with their customers. Services like Foursquare allow the business to offer the mayor, or most frequent check-in customer, to get special deals. However, Groupon doesn’t keep track of customer data and trends, let alone capitalize on this valuable information. During a Groupon deal, the business is not able to see or reward their loyal customers. Smaller, local businesses that continue to run Groupon deals drive out their regular customers with overcrowding.

Is it Worth it?

Small businesses are not obligated to use Groupon, and many who calculate their own profit and loss will opt for traditional forms of advertising and discounts. For those who go with Groupon, the publicity and introduction of new customers is only valuable if customers return and the business gains more visibility in its community. It’s also important to know all of Groupon’s terms beforehand and ignore pressure from any Groupon representative who tries to take advantage of the system. At the end of the day, if your business has to run Groupon deals more than once or twice to get customers, then it’s not working. The deal itself should have brought in enough returning customers that it is not needed anymore.

Image via ABC News