Groupon=Loan Shark

Farhad Manjoo of Slate explains how Groupon became one of the most profitable companies of all time by essentially loan sharking small businesses.

Here’s how it works: Groupon’s high pressure sales staff cajole small businesses into slashing their prices

When Groupon runs a deal with a local business, it demands very unfavorable terms. First, the merchant is asked to substantially reduce his prices. Then he has to agree to give Groupon a huge split — often 50 percent — of the tiny amount that he does make from each Groupon sale. For instance, if my fast-food shack normally sells a burger-and-shake combo for $10, Groupon will want me to offer it for $5, and then take half of the $5 sale — so I’ve just sold $10 of merchandise for $2.50.

Why would any right-thinking business owner take this lopsided deal? Because, as Agrawal noted, Groupon dangled a very attractive carrot in front of them — it would offer to pay their cut immediately. If 1,000 people purchased that $5 combo deal at my restaurant, Groupon would pay me my share — $2.50 for each customer, or $2,500 — in three payments over two months, with the first payment arriving within a week of the deal’s launch. Its sweet-talking sales staff would also promise that I’d get long-term benefits from the deal. All those Groupon customers would likely spend more than their Groupon amount, and if they liked my food, they’d keep coming back even without a deal. Many cash-poor businesses apparently didn’t consider the other possibility — than in exchange for taking a lump sum now, they were signing up to give heavily discounted stuff away to deal-hungry customers who would never step into their stores ever again. If that happened, my $2,500 in immediate Groupon cash might cost me $7,500 in lost revenue over time — ​“a very, very expensive loan,” as Agrawal put it.