Though this ad unit is profitable to sell, I think it remains to be seen whether the ad unit is delivering ROI for most categories of local businesses. Evidence suggests it’s getting customers in the door at a loss or breakeven, but not delivering long terms returns. Seems only to make sense for local businesses that can use a cheap/unique trial offer and hope to upsell to memberships. Doesn’t feel like a multi billion dollar opportunity if it only works in this narrow segment.

Matt coffin. Matt@mattcoffin.net

I was speaking to a colleague about this about a month ago after we analyzed this entire business model.

The conclusions we came to are very similar and hinged on them and one important fact that you didn’t mention. The margins they are taking from the businesses make this something that a lot of businesses do not want to do again. We’ve already seen the complaints and heard first hand from business owners we know, and their lack of success actually making money. Sure, business in the door is good, but not thousands of customers that you don’t make any money on, hoping they’ll come back again. So the strategy is ‘lose money’ hoping you spread your word. That’s expensive advertising in my book, and the greed factor of Groupon is entirely unsustainable. In fact, the prediction we concluded on in our discussions was that this type of service could easily be added to additional and successful models that can charge a lot less % or offer it as a free service. The technology is basic, so what’s to keep any major portal player from offering this in the future as a value add.

The bottom line is that there’s no way possible these margins they are robbing from businesses can last. This is a short run greedy attempt to make money around fluff buzz, the investors and founders probably already know that, would have to if they were worth their salt, and they have nothing else, no business directory, no reviews, no nothing. Just highly unprofitable deals for the business… and only profitable for Groupon, because they are taking all the profit from the business.

Horrible business model imo and it’s laughable to watch all these deal sites and options for deals on existing sites pop up everywhere with the exact same strategy. There are even middlemen deal scripts popping up who want to try and split the profit even further, as if this is some great and complicated technology. Complete lack of vision or foresight.

And Matt’s comments miss the major point of important analysis entirely. Phil is absolutely correct in that exposure and repeat business are fluff benefits. That’s laughable. I’ll say it to close one more time for clarity, and just for Matt – “Groupon makes money, their businesses break even”… and as one business who did a Groupon told us, “I don’t want to service non-profitable business, especially hundreds or thousands of them for months… that could literally ruin my business”.