Blood-Sucking Leeches

Another parasite.

Interested in my thoughts on Groupon? You need to read this instead.

Earlier this year, I wrote about one of the many parasitic organizations that earn revenues solely by selling services provided by other people. I call them the parasites of the tour industry because they live off our hard work and require us to compete against ourselves.

The BillToday I was contacted by a similar organization. This one, which I refuse to publicize with a company name or link, gets businesses to offer special deals on goods and services on the organization’s Web site. They sell the deal and then take a “commission for the use of the platform.”

The commission? 40%!

Of course, I didn’t get that information from the caller. She assured me that the service was free. She said she’d send me a link so I could check it out. She said she looked forward to having a conversation with me about it. I wondered: aren’t we having a conversation now?

I had to visit the site, poke around, and discover the commission fine print. Then I called her back. She was surprised — she hadn’t given me her phone number. But I have caller ID, so it wasn’t tough to call back. I asked point blank what the rate was and she said they do a 60/40 split. I’d get 60%.

Let’s do the math. Today’s special offer is 50% off on rock climbing for a Phoenix-area rock climbing “gym.” The price: $8. So the original price must be $16, right? But what are the rock climbing people getting? $4.80 on something they’d normally get $16 for. That’s a 70% discount. Those folks must be pretty desperate for business.

I don’t even need to do the math to know that I can’t work with these people. My margins are far less than 40%. That means that even without a special discount for buyers, I’d lose money on every sale just by paying the commission. I told her not to bother calling me again; I wasn’t interested.

The next time you find a Web site that offers smoking deals on goods and services, take a minute to consider the struggling small business owner on the other end. When you take advantage of one of these offers, you’re not buying directly from the business owner. You’re buying from a middle man who’s taking a piece of the pie. 40% is a huge piece. What’s that business owner going to wind up with?

The crumbs left behind by a blood-sucking leech.

15 thoughts on “Blood-Sucking Leeches

  1. Hold the phone, Maria. I have a very good friend that LOVES doing business with one of these “coupon” companies. While the 60/40 split may seem absurd, you fail to consider that not 100% of the coupons are redeemed. In fact, the number of coupons that go unclaimed is anywhere between 10-30%. My friends business makes money on these offers anytime the unclaimed coupons are between 7-10%. (His average is around 12-20% depending on the time of year.) He fully admits that if everyone redeemed their coupon, he’d take a beating. That’s why this business model is so successful and why business’s all over the world are jumping on the “COUPON” business model…..

  2. @Paul B
    I still don’t think it would work in my situation. My least costly flight is $495 before discount. Even if I knocked 20% off, it would still be around $400. How many people spend $400 on a special offer and then don’t redeem it?

    Not enough.

  3. Perhaps a 44 wouldn’t work while a 22 might. There is a Schweitzer operator out of Shaumberg Illinois (Bachman Aero) that swears by this model. He makes a little bit of money when coupons go unclaimed, but he also picks up a bunch of new business for his flight instruction operation that he never would have gotten if he didn’t use the “COUPON” service. Think of it as advertising. You may break even of even lose money in the short term, but you make money if people come back to your business after being introduced to it by the “coupon.”

    In essence, the “COUPON” business model is just like the gift card business model which brings in millions of dollars in profits for the likes of Best Buy, Wal Mart, etc. The business owner gets the capital up front which can be used to pay off debt and fund continuing operations. If the customer likes the business, he/she will come back and pay “full price.”

    Love your blog. Keep up the great work….

  4. All of this is true, Maria. BUT, those of us who have used this look it as investing in marketing, without the outlay of cash. The trick is to structure a deal that benefits you.

    Are they leaches? Maybe. Are they getting rich? Very! I’m sorry I didn’t think of it.

  5. @Jeane Vogel
    I just spent an hour crunching the numbers yet again and I can’t find a model that would work for my business. Maybe YOU can sell $80 worth of jewelry for $40, and still have enough leftover in your margin to give them $16 (leaving you with $24), but I can’t do anything like that. My margins are less than the 40% cut they want to take, so even if I didn’t discount, I’d lose money with every sale. And since they seem to want at least 50% off, I’d be sunk. I seriously doubt whether I’d get the 10% to 30% unclaimed rates that others have reported.

    And please don’t argue that my margins are too low. If I ran my business with 150% profit margins like other types of businesses (think retail) can, I’d price myself out of the market.

    Everyone seems to be referring to this as free advertising/marketing, but I’d really like to know how many repeat customers — without the discount or middle man involvement — they get. I truly believe that people who buy on these deals are NOT interested in buying at full price. When you discount your product or service by 50%, you’re telling them that there’s room in your margin to discount that much. You’re reducing the VALUE of your product in the eyes of the people who see the deal. Do they really come back for more at full price?

    I can tell you the answer from my point of view as a customer: If I paid $40 for something normally priced at $80, that item is not worth $80 to me. It’s worth $40. And that’s the most I’ll ever pay. If I’m able to buy something at a deep discount and do, if I want to buy again, I won’t buy unless I can get the same deal.

    I guess my question to those who have used this model is this: Over the long term, what is the real cost or benefit of this as an advertising/marketing tool? Are you REALLY adding to your bottom line? Or are you potentially damaging your business by selling yourself short and showing your customers that you’re willing to take far less than your usual price for your goods and services? Do the math and see.

    I do think it’s interesting that the company that approached me (not Groupon) is copying the Groupon model. I’m wondering how competition will affect all of them as more players enter the field.

    And I wonder how so many discount offer providers will erode the market for our goods and services.

  6. If a business owner has made the decision to participate in a group buying offer, why shouldn’t I accept the offer if I’m interested in the product? As a consumer, it’s not my job to assume that a provider has made a foolish offer and that I should protect him from himself by not accepting it. It’s the responsibility of the business owner to evaluate various marketing possibilities and accept the ones that he feels are beneficial. Something that does not work well for you may be just fine for a different business.

    As it happens, I have (once) purchased a Groupon for some burritos at a local Baja Fresh store. I had eaten there before the offer and I’ve eaten there since. I just accepted the discount as a one-time benefit, and have not stopped eating burritos there just because I now have to pay full price.

    • @Hyman
      I think there’s a huge difference between buying tacos and buying a helicopter tour. You eat every day, you don’t take a helicopter tour every day. I never said Groupon couldn’t work for anyone. I just said it couldn’t work for me — and I have trouble seeing how it could provide a long-term benefit for any small business with low margins — like mine. I know the owner of Posie’s would agree. And there are a number of business owners on the NPR story about Groupon (http://www.npr.org/templates/story/story.php?storyId=129386346) who have pretty much echoed her sentiments.

      I’d rather have no business than business at a loss.

    • @Hyman
      One more thing: I’m pretty certain that the vast majority of business owners who get harmed by Groupon participation have not crunched the numbers as well as I have for my business. So while you might suppose they went into the deal with wide open eyes and knew what they were in for, I’m willing to bet about 50% who get slammed and hurt are completely surprised by the outcome. Posie’s comes to mind for that, too.

  7. I’m not saying that you should participate with Groupon, but you said that when I find an offer I should “consider the struggling small business owner” and presumably then not take the offer. But I have neither the responsibility nor the ability to verify whether the provider has made a wise offer. I simply see that the offer is made, and if I like it, I will avail myself of it. It’s the same as with any other sale offer – it’s hardly rare to see advertised specials at significant discounts, and it’s hardly rare to find consumers who will purchase only sale items.

    As for “bad customers”, I reject that description for customers who simply want to participate in an offer as advertised, without spending extra. It’s the responsibility of the business making the offer to set the acceptable terms. For customers who are rude or want to go beyond the terms of the offer, a simple “no, I’m sorry” repeated politely as often as necessary must serve. That’s a talent that the staff needs to cultivate whether or not the business offers discounts.

    • I actually didn’t say not to take the offer. You’re reading into my words.

      I’m just saying that the deal you’re using is costing the seller a lot more money than you might think. Groupon gets 50 to 100% of the purchase price, leaving the seller with very little. What’s the seller selling? If it’s rock climbing on equipment they already own at a place that’s already staffed, getting only 30% of the regular price might not be a big financial burden on them. But if they’re selling $16 worth of food for $3 (as Posies was) it could hurt more. When people are using multiple coupons to complete a single purchase, the seller simply loses money.

      As for customers, YOU might be an ideal customer — just the kind of person a seller wants to attract. But as a business owner, I can assure you that not all customers are created equal. Read the comments on the post on NPR about Groupon (Google “NPR groupon” and click the cupcakes article link if I haven’t linked to it here) and read what sellers are saying. Some customers attempt to bend the coupon rules, tip based on what they pay (vs full price), and complain unreasonably. These are NOT the kinds of customers most small businesses want. I’d rather have only one, good, easy to please customer paying full price than 100 bothersome customers coming in to take advantage of a special deal that I’m likely losing money on — especially if I’m not likely to see many of those customers again at full price.

      If you haven’t already done so and have the time, read the followup to this blog post, where I talk more specifically about Groupon’s pros and cons. It’s called “There is such a thing as too much business” and it should be linked to above.

      While this post focuses on this kind of deal for my low-margin business, the newer post takes a much broader look.

  8. …”When you discount your product or service by 50%, you’re telling them that there’s room in your margin to discount that much. You’re reducing the VALUE of your product in the eyes of the people who see the deal. Do they really come back for more at full price?

    I can tell you the answer from my point of view as a customer: If I paid $40 for something normally priced at $80, that item is not worth $80 to me. It’s worth $40. And that’s the most I’ll ever pay. If I’m able to buy something at a deep discount and do, if I want to buy again, I won’t buy unless I can get the same deal.”

    INDEED,UNLESS YOU`RE GIVEN A SMALL QUANTITY/AMOUNT AND JUST FOR A SHORT SPECIAL/PERIOD DAYS ONLY !

  9. Maria, I found your blog by following the link in a comment you left on Posies Cafe’s blog about their experience with Groupon. I own a boat rental company (also very high overhead), and when Groupon contacted us, we did the same thing you did: tried to figure out how to make it work. We, of course, couldn’t. Lately, I’ve been bombarded by requests from local Groupon knock-off’s to try their great new deal of the day site(s). Their selling point: “The difference between us and Groupon is that Groupon takes 100% of the sales while we give you half!…You don’t pay us, we pay YOU!” Um…that’s 50%. And not just 50%, but 50% of 50%. And, yeah, I AM paying you. I have been politely responding that I don’t support the Groupon business model with a link to the Posie’s story, so that they can see for themselves what this business practice does to small businesses. :)

    • I’ve been called by just about all of the Groupon clones now. If I’m not busy, I let them give them their sales pitch and pretend I’m interested. Then I start reciting numbers to let them know just how much their “deal” will hurt my business. If I am busy, I’m not quite as nice.

      Here’s how I see this playing out:

      • Desperate businesses will fall for the Groupon/clone line and do deals. They’ll suffer. Some of them may go under.
      • Smarter businesses who want to try Groupon will offer crappy deals that satisfy Groupon/clone requirements but don’t give much to consumers. This will turn off consumers. Some people I know already consider Groupon emails spammy.
      • Eventually the number of sucker businesses (for good deals) and sucker customers (for bad deals) will reduce to the point that the Groupon business model can no longer be supported and Groupon/clones will disappear. Last I heard, Groupon still hadn’t turned a profit, so that’s not so far-fetched.

      Time will tell. Until then, all I can advise business owners is to never do a deal that forces you to sell goods or services at a loss.

      Good luck to you!

What do you think?