Why Groupon and LivingSocial are having problems →

Megan McArdle:

As far as I can tell, small businesses viewed Groupons largely as the former: you give away your product near cost, and gain new customers from Groupon’s huge mailing list.

Anecdotally, Groupon’s salespeople in fact encouraged businesses to give their product away at a loss in order to attract new consumers. By lowering the cost of trying your restaurant or salon, the theory ran, you could win new business that you wouldn’t otherwise have gotten.

The problem is that for consumers, it seems mostly to have been about price discrimination; people used Groupons to buy something that they wouldn’t buy at full price. So while your Groupon deal brought in a huge stampede of new customers, those customers were either too cheap, or too poor to spend a bunch of money at your business. Restaurants, who were supposed to be one of the core businesses for daily deals, complained that Groupon customers were disproportionately poor tippers who took up tables while carefully not spending any more than the face value of the Groupon–no drinks, no dessert. Then they never came back.

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