A Tale Of Two Internets

Amy Kunkle had a nice little business going until Groupon called.

If you’re not familiar with Groupon, they pretty much invented the “daily deal” online. They’ve become quite popular, but the horror stories are growing fast. Amy Kunkle’s is merely one that I’ve heard about.

Here’s the nutshell: Groupon’s salesman talked her into selling a $30 coupon for $15, but guess what the split is on the sale of the coupon? Fifty-fifty.

Yep, Amy Kunkle sold a $30 coupon for $15 and got $7.50 back for each sale. She sold 450 coupons. That’s $3,375. Pure profit, right? Wrong.

That’s the money she made from the coupons. But when customers came to redeem them, they didn’t buy any more than the $30 of merchandise they were getting at a discount. If you’re doing the math, that $13,500 worth of product she “sold” for only $3,375. Not a very good business decision, it turns out. She figures her loss at close to $10,000.

But what does Groupon care? They made money.

Now, Groupon can’t guarantee that coupon buyers will purchase more than a coupon is redeemable for. I got that. But Amy Kunkle also didn’t know she could cap the number of coupons she sold. Would that have mattered? Maybe. Or maybe not. A loss is a loss.

In this case, she lost her business. That is, until her customers decided to pitch in to save it. And that’s the second tale that bears a retelling.

Amy Kunkle’s Reprieve

After taking out a loan to pay for her losses, Amy Kunkle struggled for a few months. Then, one day she decided to throw in the towel. She sent out an e-mail, a Twitter message, and posted to her Facebook page that her specialty retail business was closing.

That’s when human good will took over.

Through small loans from her customers, Amy Kunkle was able to stay in business and continue providing the products that she had become known for. They were products that were helping people with food allergies. That’s a story worth retelling.

Beware The Golden-Tied Online Saleman: Doing The Math

I’ve never used Groupon. Thanks to this story, I never will. Nor will I recommend it. Here’s why.

Let’s say that Groupon makes similar sales to Amy Kunkle’s to the tune of 100 per month. At a $3,375 average revenue per customer, that’s $337,500 total revenues per month whether those customers make money or not.

I understand that Groupon has expenses. I also understand they need to make a profit. But how many customers do they have? I’m betting more than 100. Probably more than 1,000. And they make a 50% profit on every single coupon they sell? I think that’s pretty steep.

I don’t know anything about Groupon’s business model other than what I’ve just said, but it seems to me that a 50% commission on an item that could potentially lead to a net loss for many businesses is way too much. Groupon’s business model is based on volume. The deal-of-the-day model is based on the “group discount” model, so why would a company insist on getting 50% of a sale of a coupon that probably doesn’t cost them that much to make?

The Groupon deal could work for some small businesses, but I think for many others it is a potential pitfall. Before you sign on, do the math.