Is Groupon a savior or a destroyer?

June 15, 2011

By James Ledbetter

The opinions expressed are his own.

You could hardly imagine a starker contrast. The Wall Street Journal this week portrayed Groupon and rival group-purchasing sites as the ultimate friend of the small business owner. The Journal interviewed Cynthia Yee, who runs a Chinatown walking-tour business in San Francisco. Yee told the paper she’d participated in at least 7 “deal of the day” promotions in the last 18 months; Groupon alone sold a whopping 1700 vouchers for Yee’s service. Yee estimates that the deals brought in $25,000, and her trade has exploded to the point where she’s had to hire two assistants.

But that was not how things went for Posies Cafe in Portland, Oregon. In a lengthy series this month on TechCrunch, entrepreneur Rocky Agrawal has used Jessie Burke’s nightmare experience to paint Groupon not only as an unscrupulous exploiter of small business, but as a company built on a house of cards. (A lengthy video interview with Burke is below, and you can also read her blog account.)


These are only the most recent and prominent observers predicting that Groupon will fail, essentially because it is bad for businesses.

So which is it? A bit like a Congressional session, this could be an illuminating debate if only the two sides were listening to one another.

There is an apparent logical inconsistency to some of the detractors’ arguments; that is, if Groupon really is ripping off local businesses, that would actually, at least in the near-term, be good for Groupon’s bottom line.

But social-coupon critics’ arguments carry a consistent, deeper flaw, echoing those who have historically underestimated Netflix. I’m not talking about criticisms of either company’s market valuations (those are indeed hard to justify), nor the fact that the nascent social-coupon category is likely to get bigger; these are givens. It’s more of a conceptual myopia that arises when a company makes its early reputation doing one thing really well. As with Netflix critics who could only conceive of the company as a shipper of physical DVDs, detractors of Groupon et al tend to focus narrowly on the most obvious service: delivering coupons to customers who’ve signed up for them.

But as the Yee example demonstrates dramatically, social coupons are much more than that – they are potentially one of the most focused advertising vehicles ever invented. Even if Groupon takes a 50% cut of the money going to a tour guide like Yee (and presumably competition will bring that rate down somewhat), it needn’t be a zero-sum transaction, because she is reaching an entirely new customer base. Unlike the Yellow Pages or the Valpak coupons that land in your mailbox, a Groupon campaign can be laser-targeted to those most likely to respond. Indeed, Groupon’s cross-posted data should be able to produce demographic connections—men who do yoga, say, might be five times more likely to sign up for National Geographic magazine than the average—that would never occur to most marketers.

Moreover, the trajectory of fast-growing Web-based companies—think Facebook, Twitter, Tumblr—is that they tap the millions of users they gather to become a platform for unplanned interactions and businesses. Few would have predicted, for example, that Twitter would turn into one of the most valuable customer service tools for Best Buy and other corporations. Similarly, while it’s hard to forecast precisely how social-coupon companies will evolve, it is a reasonably safe bet that if you are in very regular contact with millions of people who are comfortable handing you their money, new businesses and revenue models will emerge–particularly if you let the customers talk to one another.

This is not a defense of any alleged unsavory practices (if Groupon really did demand 100% of the offer it created for Posies Café, that’s reprehensible). Nor is it to assert that social coupons are a silver bullet for all businesses; my colleague Felix Salmon has dissected the likelihood of Groupon success for different kinds of businesses: midrange restaurants should be able to do well, booksellers will likely lose money. A just-published study from Rice University strongly suggests that in order to get the best social-coupon benefit, businesses must be very careful about the size and structure of the deal they offer.

The reality is the category of “small business” in America is far too vast and variegated to allow for too many generalizations, aside from the fact that most will fail. The exact failure rate is debatable, but even the sunniest estimates are at 50% after five years. If Groupon and its rivals are truly exploiting small businesses, then presumably small business will eventually reject them (to date, all evidence points to the contrary). More likely, social coupons are one powerful weapon in a small business’s arsenal; those who use the weapon wisely will succeed, even if a few shoot themselves in the foot.

Photo: A Sikh brandishes a sword during a protest against the Dera Sacha Sauda sect in Jammu June 21, 2008. REUTERS/Amit Gupta


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Here is another interesting article on the same front: secret

Posted by SamIAm5000 | Report as abusive

Really good stuff, James. It’s interesting that the coffee shop owner in the video admitted she didn’t tell her regular customers about the deal. As much as she feels gypped by Groupon, I might feel gypped if I was getting my coffee there every day and no one bothered to tell me I could get it for half the price (or treat a few friends).

Posted by bobbycalise | Report as abusive