The pros and cons of Groupon

Heres a little quiz for you:

Which statement is true?

• Groupon is the best thing that ever happened to small businesses looking to get new customers, or
• Groupon is a doomed business model that is hurting entrepreneurs, and putting consumers at risk.

Whether you pick A or B may depend on your own experience with the hugely popular deal-of-the-day website. Not even three years old, Groupon is already estimated to be worth between $15 and $30 billion.

Raging success that it is, in the past few weeks a decidedly negative tone has overtaken discussion of Groupon:

"Why Groupon is Poised for Collapse" was the headline last week on a Techcruncharticleby Rocky Agrawal. In it, the entrepreneur/writer claims that "Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business." He makes the case that entrepreneurs who choose to use the site to gain new customers are making a "terrible financial decision."

CBC Radios popular daily program "The Current" reported on the story of a Toronto butcher who offered $400 worth of meat for $100. He was deluged by so many new customers that it became a nightmare. His staff was verbally abused by frustrated buyers; he practically broke down in tears during the radio interview. The in-depth report laid out a thorough list of the many risks of e-deals not just to customers and small business owners, but to the deal-of-the-day sites themselves, that sometimes end up having to refund users money when participating businesses fail to deliver or go under.

Earlier this month two start-up entrepreneurs engaged in a debate on Twitter, one arguing Groupon stock should be treated like Greek bonds, since the "likelihood of failure is so high". The other pointed out that Amazon.com took some time before it turned a profit, and that Groupons huge revenue will make it "easier" to figure things out.

I wonder how much of the negative attention has been inspired by Groupons recent move to sell $750 million worth of shares? There's nothing like saying you're worth billions of dollars to get critical eyes looking you up and down.

So whats the truth? Is Groupon and its knock-offs doing right by small business owners? Or setting them up to take a load of aggravation while also losing money?

Caveat emptor

Theres no question plenty of consumers love e-deals. Goods and services are typically offered at deep discounts, for example, $40 of pub fare for $20, an $85 session with a hair stylist for $30.

(Im still kicking myself that I didnt sign up for the bargain-priced "car detailing" that could be done right in the customers own driveway).

The appeal for the businesses that participate isnt quite so clear. When a Groupon knock-off was pitched on Dragons Den early during the past season, Brett Wilson was mystified why any company would participate.

"You just took someones product, sold it as a discount, took half of the proceeds yourself," he commented. "You just blew out a guys inventory for a fraction of what it was worth. Wheres the fun in that?"

Marketing maven Arlene Dickinson had a different take on the pitch: "I know this model well," she said, commenting that e-deal sites make the cost of customer acquisition affordable. "Im a huge fan."

Andwhen I first wrote about the Groupon e-coupon phenomenonlast December, the three Canadian entrepreneurs I spoke to had all been happy with their Groupon experience. They did caution that participating in these offers generally isnt a money-maker its an expense, just as any form of advertising or marketing is a cost of doing business. I also heard that its easy to be overwhelmed with penny-pinching customers.

But I came away with a sense that Groupon is an exciting way to round up a huge whack of new customers who come for the deal, and hopefully stay for the wonderful product or service that theyve discovered. Surely the proof of its winning formula is its many imitators, such as Livingsocial, Wagjag, Teambuy, Townhog, Dealfind, Stealthedeal, etc.

(Heres a chartthat shows the relative size of the various e-deal sites in the U.S. It describes Groupon and Livingsocial as "gorillas among ants".)

After seeing the recent spate of negative commentary, I decided to solicit Canadian entrepreneursfor comments on Twitterabout their experience with Groupon. The responses were literally split down the middle, between positive and negative. Heres a sampling:

• "We have chosen not to market 'Groupon' style, we feel it will only bring us short term clients that are dedicated to price All About Imports, a repair shop for imported cars in Mississauga Ontario.
• "What's not to like about Groupon? They attract large groups of people, and pay YOU for that service! Great for services esp." Shinka Martial Arts, Richmond B.C.
• My partner says his company would go under if they did a groupon. No good for retail." David Hunter Garden Centres, Surrey B.C.
• "IF you understand their biz model, and your own, GREAT! reciprocate commerce, known value of advertising $. Works!" Mola Mola, a Kingston Ontario company that specializes in fair trade certified gifts and care packages.
• "I work in the fast food restaurant industry. We are franchised based. The few that have tried are not happy. The guest wins!" Extreme Brandz, franchisor for Extreme Pita and Mucho Burrito, Mississauga Ontario

My conclusion is that Groupon and all of the other deal-of-the-day websites can definitely be effective in building a business. But its also clear that some serious number-crunching and intense preparation needs to be done before-hand.

Seller beware.