GroupOn -- Good for Meth Dealers, bad for Fishing Guides

Working online means I'm sometimes surprised by what people don't know… For example, I had a client email me this morning saying that he's seeing a lot of people in his industry 'being really successful' with GroupOn and Living Social. And then he admitted he thought he knew how it worked, but didn't really…

So here are the quick cliff notes on GroupOn and Living Social.

Basically GroupOn and Living Social send out a coupon that you can buy for a limited time, usually a day or so. Say you were a fishing guide and you wanted to pick up customers for your fishing trip. You normally charge $200 per person for the day so you do a coupon:

    50% off! $100 fishing trip!

Some woman buys a trip for her husband as a gift. Only GroupOn is going to keep 50% (Living Social generally keeps 40%), which means your guide is getting 50 bucks for a trip he normally charges $200 for.

Folks like fishing guides are losing out big time on these -- not only are they getting a quarter of what's already a pretty much break even deal, but the people who buy these coupons aren't generally going to come back. It's a once-in-a-lifetime trip, or something that was kind of quirky, but not something you're really going to do a lot of.

Massage therapists are apparently losing out, too, because there's so much competition -- there's a new massage for half-price showing up in these things all the time, and while a customer might really like you and come back, most of these folks are one-time deal seekers, and suddenly you're giving a massage for 15 bucks.

And then there are the stories of how the success of the GroupOn killed a restaurant. If you're running a marginally successful business and you take 75% off the top AND suddenly create an unnatural rush in the restaurant that you can't predict, suddenly your inventory, staffing and, worst yet, customer service, are all thrown into disarray because you can't keep up with demand, and you aren't really getting paid for that demand.

This gets back to my 'there isn't anything new' mantra -- we're still just publishing a coupon. I don't care if it's online, in the newspaper, or in one of those books high-school kids used to sell. The basic rule of any coupon is that you have to at very least break even on it, and preferably make a little money on it.

There are ways to make the coupon work for the folks who are losing out. The massage therapists can put a cap on how many coupons they'll sell, and they can schedule it so they only fill those coupons on days that they have other, full charge work going on. Same thing for the fishing guides. Restaurants… Yeah, not much you can do but make it a coupon for something specific like a meal that doesn't have a lot of expensive, perishable ingredients.

But the folks who are really winning on this are the people who often give away free consultations anyway. Enter weight loss and dietary supplement multi-level-marketers. They've already got their free samples, or they have a service like a Body Composition Report ('A $100 value!'). They'll work with that flow of underpaying customers because they always start with a loss leader -- the entire business model is built on residuals.

Which is why I think selling illegal drugs through GroupOn will eventually be what makes GroupOn profitable. Give something valuable away to 'new clients,' get them hooked, and then you own them. 'A gram of meth for $50!' Sure, you're selling four hits of meth and only making the cost of one hit, but you're going to get repeat business. Perfect GroupOn.