Young Upstarts

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Groupon’s Business Model From A Different Angle

I recently read a piece by Redfin, the online real-estate company, about a story of Groupon and how it destroys small business. In this case, Groupon destroys a small coffee shop in Portland, Oregon and it got me thinking about how a startup’s business model should be flexible and how it relates to a  customer’s and your own company’s profit.

Of course, both are important. But this is the hard part of creating a business model for your startup, at least that’s your homework as startup founder.

Here’s a snapshot of the Groupon story, according to Redfin’s blog post.

After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally couldn’t not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising.

Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces or who tipped based on what they owed.

In this case, Groupon’s model did ruin the business of the coffee shop, their “advertiser” and partner. If you look at it from another angle, you can really blame the coffee shop owner who apparently miscalculated. I mean, Groupon shouldn’t get all the blame here, it’s unfair, but still Groupon has an important role in this mischief and Groupon is obligated to help their partner to not make bad deals. After all, the coffee shop IS Groupon’s customer.

Of course there’s a flaw in Groupon’s model where end-customer (the deal-hunters) can use multiple Groupons for a single transaction, this flaw has to be fixed. But more importantly, Groupon has to come up with a method where it gives credibility points for the deal-hunters. So far Groupon got an excellent credibility values for their advertisers and partners, but not for the deal hunters. This way, the coffeeshop can see which customer has a good credibility and *probably* making these alpha-hunter as their main target instead of deal-hunter that will do anything to get anything cheaper.

That’s just an idea.

The whole point of this story is, as a startup you have to make sure that you can guard the system very well for the sake of your profit and your clients’ (partners, advertisers, end-user, all of ‘em). Make sure they all get benefit from your services, and services for each entity doesn’t make other entity lose benefit. That’s why they call it, WIN-WIN. Wham!

Other excellent points made by Redfin:

We’ve learned through our own painful experience to think like a shop-keeper rather than a web entrepreneur, focusing on happy, profitable customers rather than growth at any cost.

We’ve also learned that the customers you attract only with a discount will disregard what you love about your own business, and won’t treat you with respect; both sides usually regret the transaction.

And finally we’ve learned to be wary of fancy approaches to advertising return on investment. Whenever I hear a Groupon-type pitch — the old advertising saw about the lifetime value of a customer — I assume what they’re selling in some small but important way defies common sense.

So, please remember, dear Groupon-clones out there, you’re making money for your customers, not only for yourself. Think like a merchant, Redfin said.

ps: Thanks Aulia for the Redfin’s blog post.

Rama Mamuaya is the founder of and also the main contributor for DailySocial EN, an award-winning blog covering Indonesian tech-startup scene. Highly active in the startup community in Indonesia, he plans to take Indonesian startups unto the global scene.

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