What Is Groupon and Why It’s Dangerous

by Neal Frankle, CFP ®

You’ve probably heard about Groupon and how it’s the best thing since sliced bread. I don’t like it because it’s going to result in a lot of people spending money needlessly. If you’re wondering how to stop spending money, this is not going to help you. In case you haven’t gotten hooked yet, here’s the skinny on this new craze as I understand it.

What Is Groupon?

To start, a consumer would sign up at www.Groupon.com. After that, you’ll get an e-mail with a killer deal – you know…something you absolutely positively can’t live without – every day. The vendor makes the deal available only if enough people buy. If enough people don’t take the vendor up on his/her offer, the vendor withdraws the offer. Even if you still want the deal, it’s too bad. You won’t get it. On top of that, Groupon piles the pressure on by putting on a time constraint. If not enough people purchase by a certain time, the deal is off too. It’s a simple and brilliant business.

Groupon asks a few questions about you to try to get to know where you are and what your buying preferences are.

As you scroll down the screen, you’ll see the “deal of the day,” and that’s when the pressure starts.

Why Groupon Is Dangerous

Evil might be a tad strong. But I do think Groupon could wreck your budget and credit score really easily. Get enough of these offers and you’re going to be spending money you didn’t plan on spending. Trust me on that. They’ll convince you that you’re saying money. But you may have to start borrowing money just to pay off the debt you’ve accumulated to “save all that money.”

You see, when they send you these deals, you’ll see how much money you save by taking advantage of the offer. You’ll also feel like a putz for not selecting “BUY NOW” because the time is tick tick ticking away and you don’t want to miss out. This is the same old trick used by the Home Shopping Channel and how it got millions of viewers to buy crap they didn’t need. I know of a few cases where people actually got hooked on this show and spent their entire day – and retirement – on the wares being offered.

In my opinion, the likelihood is great that a lot of people are going to end up spending a ton of money on junk they don’t need but are convinced they want. That’s why I’m not a fan of Groupon. If you have a lot of self-control, I suppose it might be OK to sign up and get the deal of the day.

(For my money, I’d rather pay full retail if I have to for stuff I really want and have done the research on rather than buy lots of things I don’t really need at a discount. Shopping is dangerous because the activity involves a chance to spend money on stuff you don’t need. Why not just go shopping as you need it? The individual item may be more expensive, but you’ll save in the long run because you won’t expose yourself to the risk of buying for its own sake.)

The lie is the “Total Dollars Saved.” Sure, that number might be right when compared to the amount that would have been spent on the schlock at full retail. But my guess is the people who bought the “deal of the day” could have easily lived without it. The number of “total dollars saved” by people who didn’t subscribe to the site is likely 10 times the figure above.

What’s your take on Groupon? Do you agree or disagree about the dangers of Groupon? Yes, money can be saved if you spend wisely, but for many this is just another spending trap.

 

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{ 30 comments… read them below or add one }

catherine September 29, 2013 at 1:54 PM

Its like shopping in Costco ,BJ or Sams Club-only get what you need and then you will save money. If not, its like being a shopping spree and you cant get out without going over your head. Be Dollar Wise ! Use the service conseratively and wisely.

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Grouponer March 6, 2013 at 4:50 PM

Groupon is a GREAT service and a brilliant way to bring all sorts of business to consumers. My Problem with groupon has been with some of the companies using it. Some offering their ‘great deals’ don’t follow through. Hidden costs appear out of nowhere, some don’t return calls, some have very bad attitude and some simply have poor, poor service. My guess is their profit is low with the discount?

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Mack October 20, 2011 at 12:21 PM

Reality: Groupon is free-wheeling free enterprise at its pseudo finest.

But Wait! Even More Reality: Groupon could fall from the face of the Earth this instant and not be missed, excepting lenders/investors.

Thanks, Neal.

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Jen August 19, 2011 at 5:00 AM

Great article! And good comparison to the home shopping network. Ha! It is VERY easy to get sucked into! Your right, self contol is a must! I haven’t yet signed up. I’m a Maui Photographer, do they have hawaii deals? Or anything photography realted?

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Neal Frankle August 19, 2011 at 8:24 AM

Jen. Not sure what they offer since I opted out. But living in Maui….what other deals do you need? That’s the deal of a life-time!

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Brian July 25, 2011 at 8:35 AM

I completely disagree with this. How is Groupon bad? Because it entices a consumer that’s struggling with credit card debt to buy? If a consumer is struggling that bad with credit card problems that they can’t afford a $20 deal, then they should tear that card up and focus on paying it off instead of going to these sites. They should NOT be online shopping at all, which includes nordstroms.com, 800flowers.com, ebay, etc… Groupon is a site that is offering “deals” to consumers. These businesses take a big hit when they sign up for Groupon because they are banking on the consumer to return for future business. Therefore, if a consumer sees a deal that they can and will use, then they should take full advantage of it. Groupon is no different than any other form of online shopping.

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Steph April 20, 2011 at 6:32 PM

I like Groupon and also subscribe to a couple of the other similar sites. But, I don’t get caught up in buying a bunch of stuff I don’t need. We usually buy the restaurant ones for place nearby that we know we will use. We go out to eat usually twice a week and usually flip through our groupons to pick a place.

We’ve been lucky that some places we really like going anyways were included and just plainly saved us money. In other cases we tried new places and now go back there on occasion and pay the full price so it was good advertising for the business.

Some prices I think are inflated and I would never pay the full price for the items anyways but the groupon price is more in line with what I consider reasonable.

We have bought two groupons that we didn’t use a couple years ago but since then have been good about only buying ones we know we will use and enjoy.

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TK April 18, 2011 at 12:21 PM

Not to mention…it’s really bad for (most) businesses

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ron April 16, 2011 at 9:33 AM

I agree with your statement about Groupon. I cancelled it about three weeks after subscribing.

The Bait is up to 90% off. How can they get away with this misleading advertising? I thought we had laws against bait-and-switch programs.

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Colin April 11, 2011 at 9:24 PM

I mean nothing negative by this post but there’s no new information here. This marketing strategy is so played played out its painful. As you said it has been used by the shopping network for ages. But that said this argument is also played out. Your conclusion states that “If you are serious about saving money, you’ll start by unsubscribing to Groupon”. That’s cutting it a little black and white. May I offer a grey alternative: “If you are serious about saving money, you’ll start by understanding Groupon”. This too is a basic yet often overlooked strategy. If you like it, keep it, if you don’t like it get rid of it. But please above all else understand it (reading this article is a great first step).

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Carl Ruzycki April 11, 2011 at 4:22 PM

The Groupon business model is not a win-win for the merchants, plus has state issues as Groupon is selling Gift Certificates with expiry dates which is an issue in many US states. The proof is the number of state class action lawsuits lodged against Groupon. MobGob is the owner of the Groupon business model and MobGob is now deciding as to their next step – take action before or after the $25 Billion IPO.

Yes, buyers are buyers and they are motivated to buy because it is a deal at 50% off, whether they need it or not. That is the premise that Groupon built their business model. “A 50% off Deal”. Caveat Emptor to the buyers – If you can’t afford it, then don’t buy it.

But where the Groupon business plan falls down is in the win-loose relationship with the merchants. This is how a groupon works. An item for $40 is reduced to $20 and then Groupon takes $10. The merchant gets about $8.00 as he has to pay taxes on the full amount before it is discounted and gets paid in 90 days after the groupon is over. So how is this a deal for the merchant. The $8 is typically far below the product or service cost. Not in all cases but most. A groupon only attracts the 50% off buyer, the kind of buyer that will can only put the merchant out of business at these losses. The 50% off buyers impact the full price clientèle as they learn they are paying 2x what the person at the next table is buying and they stop coming back. 50% off buyers will not come back to pay full price as they are deal oriented. Would you? There are so many daily deals, one would not do the same deal twice.

The merchants like the buyers have to be more astute when they get into a groupon as either the buyer or the seller. If the merchants, who have the power to say NO to the terms of a groupon can actually force Groupon to take less from the merchant and make it more a win-win. If this does happen, the reduction in Groupon profits doesn’t make it is a profitable.

Bottom line: No Merchants = No groupons = No Groupon.

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Steve November 3, 2013 at 5:31 PM

I couldn’t agree more with your description of the win-lose situation with merchants. As a small business owner, I believe it’s alright to occasionally produce a special or run a particular coupon to attract new clientele. The problem with the Groupon type deals is there is always a business in your area that is offering something in your line of business for a significantly reduced rate. As some of the people have admitted in this string, they will eat out at restaurants that offer these deals and go to a different venue each time. What the average patron doesn’t get at all is the prices the merchants receive for their product or service from a Groupon deal is well below the merchants cost to provide these products in most cases. I can’t speak to all industries of course, but this is true for the greater majority.
So if the daily deal buyers only shop at daily deal merchants, eventually these merchants will go out of business along with the daily deals.

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Neal Frankle, CFP ® November 4, 2013 at 1:13 AM

Steve, well said. And then of course Groupon goes onto the trash heap as well….

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Sam K April 10, 2011 at 6:49 PM

This is the completely wrong reason to say groupon is evil. Groupon is bad because it is destroying the growth of small businesses. Did you ever wonder how groupon makes it’s money? Virtually the entire cost of the “groupons” goes directly to groupon and the businesses that are making the offers in conjunction with groupon just barely break even, or are even sometimes at a loss. The reason companies offer groupons is because they hope that it will increase awareness of their product, business, etc…and eventually bring in more revenue. But, in every instance i have seen (which, for context, are several small pizzerias and eateries in a busy city), the businesses have had literally ZERO cash in their registers and had to actually refuse to accept groupons. While it may seem like an easy way to save cash to the consumer, groupon is greatly hindering our countries ability to recover from the recent recession by hurting the growth of small business that ultimately put the money into consumers hands.

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kh April 10, 2011 at 7:26 PM

@Sam K – I actually disagree with your point as well. I am a small biz owner who applied to present a Groupon offer. They do not take all the money and the “entire cost” does not go to Groupon. There are businesses who offer too much and don’t think about how they are going to accommodate the volume they are offering. That’s THEIR fault as business owners, not the fault of Groupon. Had I chosen to go forward with my Groupon offer, I would have designated a custom offer just for those clients and I would have limited the number of them offered. I actually wound up not going with Groupon because the only date they could give me for my offer would be in the middle of my busy season – when I was hoping to get a Jan or Feb listing instead, to fill in my slow time. I will still consider offering a Groupon special, as long as I can do it in the “off” season.

But to get back to my point … blaming Groupon for the fact that business owners are not being smart about how they structure their offers is just as incorrect as blaming Groupon for being “evil” in luring consumers to buy what they don’t want.

Again. Personal Responsibility. On the part of both sides.

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B Kelly April 10, 2011 at 5:43 AM

I totally agree that Groupon is dangerous. Esp for ppl who have little self discipline when it comes to their personal finances, coupled with the temptation of ‘crazy’ deals or savings will definitely be a lethal combo.

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Doable Finance April 10, 2011 at 4:30 AM

I feel the same way about Groupon. They are expensive coupons. I can’t afford to use them. I have a thing about coupons. They are good without doubt. But I don’t want to get carried away with something I don’t really need and can’t afford.

There are folks (read millions) who would buy things just because they are on sale whether they need them or not. The same goes for coupons. Folks buy because they have coupons. And some of the things if they are perishable will rot in the fridge and get thrown out during spring cleaning days.

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Terry April 8, 2011 at 6:38 PM

For me – the jury is still out. I subscribed to Groupon hoping to save money on things that I like.

The truth is – out of all the offers they send me – which is daily – I have only taken advantage of one. The other deals I am not interested in.

Really – I am getting tired of the emails. Can someone say unsubscribe?

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MoneyCone April 8, 2011 at 1:28 PM

I don’t know, I never really found anything useful with Groupon – usually it is some deal on restaurants or massages and spas – things I can live without.

But for regulars, I guess it serves a purpose.

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financialwizardess April 8, 2011 at 10:45 AM

I could not agree more! I am the only one of my friends that isn’t into groupon, and I am probably the highest net worth (by far). I also don’t use coupons from the newspaper because they are usually on brand name (over-inflated priced) stuff that is still more with the coupon than the generic. I figure with groupon, why tempt myself to buy stuff. I find that people that read a lot of catalogs spend a lot of money. Groupon is just a catalog that always bugs you to buy buy buy. No thanks, I’ll buy when I’m ready, what I need. And usually I can find a deal just by waiting or leveraging.

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Neal@Wealth Pilgrim April 8, 2011 at 6:00 AM

@krancents, @kh, @Richard

You all make a good point. At the end of the day we each have to take responsibility for our decisions and actions. I with that 100%.

The tone of this post was in response to another post I read at a very large blog. The writer was writing about how great Groupon is. I thought by offering a counterpoint, it would be helpful.

I am sure that most people aren’t duped into overspending at a crazy level. But I do feel that Groupon is just advertising. Hit enough times, you’re going to buy some crap that you don’t need.

Also, I’ve need the result of what Home Shopping Network can do. A widow client with very little left to do or be excited about bankrupt herself with HSN. It’s her own fault of course. But I wanted to offer a view of what can happen so people who are prone to overdoing might save themselves the financial heart ache.

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Richard Stooker April 8, 2011 at 4:45 AM

I’m sure you’re right in that some people will spend more on Groupon than they otherwise would have, for items they don’t really need.
Still, it’s troublesome because at some point you’ve got to give people the freedom to make some mistakes. That’s how they learn. We are already bombarded with a gazillion marketing messages every day. People who want to overspend their budget certainly have plenty of opportunities as it is. They don’t need Groupon. Plenty of people right now are going farther into debt without Groupon’s help.
And there’s a point at which it’s hard to define what people really “need.” Once we’re past the basics of food, clothing and shelter, we’re buying items for intangible benefits such as how good it feels to own it, for social snobbery and so on. None of that may be wise from a strict, financial point of view, but most people’s emotions don’t adhere to accounting standards.
Let’s face it, if we bought only what we really need, the world would look like Chairman Mao’s heaven on Earth. We’d all wear the same clothes (why look different, so long as the clothes fit and keep you warm?), drive the same cars, live in the same dreary houses and eat the same nutritious but dreary food. There’d be no sports, no entertainment, no art. The Chinese rejected this lifestyle.
All right, I’m taking the argument to an extreme. And I certainly agree people should live within their budgets and not go into debt.
Because that is not obvious to everybody, it’s good to maintain an ongoing education for people.

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Yakezie April 7, 2011 at 7:59 PM

Hey Neal! Come on mate, buy more spend more! Hope all is well with you. Glad the markets are back!

Best,

Sam

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kh April 7, 2011 at 7:25 PM

I’m with @Alex. I have no “pressure” feelings to buy things I’m not interested in and in the meanwhile I’ve gotten some really good deals on things that I’ve wanted anyway.

I think the key thing that’s missing in your post is PERSONAL RESPONSIBILITY. I’m tired of seeing websites, books, movies, TV, ads, whatever, branded as EVIL because they “pressure” people or “lure” people or whatever. No one is forcing anyone to buy what is advertised. No one is holding a gun to your head to make you pull your credit card out of your wallet and buy now.

Saying Groupon is evil and will cause people to go even deeper in credit card debt is like saying potato chips are evil and should be destroyed because some people might eat too many of them and get fat. If you personally can’t handle it, then absolutely unsubscribe. But your (generic you, not pointed at anyone) inability to control yourself on the site doesn’t make the site evil, any more than my inability to eat a single serving of potato chips makes potato chips evil.

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Jessica07 April 7, 2011 at 1:24 PM

Great article. Too many people get wrapped up in the “savings” and forget to look at the important number: what they’ll be SPENDING.

Of course, chances are, if we’re familiar with finance through your blog, we may know better. ;)

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krantcents April 7, 2011 at 10:51 AM

Groupon is no different than a sale! If you cannot resist it, you have a problem. The same is true with credit cards, you should act responsibly.

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Echo April 7, 2011 at 7:32 AM

I agree that the “deal” is typically for something you can live without. I hate subscribing to these types of sites because they always get you thinking about buying something outside of your normal budget. Just because it’s half price doesn’t make it a great deal for you.

My rule is that if I’m about to make a major purchase I will look online and at these group buying sites to see if there is a deal, otherwise I’m not interested.

I do think that if you “want” to try something new like a spa treatment or yoga classes (or whatever) then Groupon is a good place to go check out.

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Alex April 7, 2011 at 7:02 AM

Perhaps it’s just me… but I’ve subscribed to groupon and similar sites… and I don’t feel at all tempted to buy things I wouldn’t normally. I look at the deal and if it’s something I wanted previously I’ll get it. If it’s something tempting I’ll check my budget, if I can afford it, I will, otherwise like any other offer I hear about I won’t. I find it no more tempting than hearing/seeing ads on TV and radio or in print media or anywhere really.

I’m sure they feeling of urgency can trick some but I think the underlying issue is how woefully ignorant people are of good budgeting skills not any particular marketing strategy (though many of them do take advantage of the ignorance of the sheeple)

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David April 7, 2011 at 6:59 AM

The wife and I have been good about only buying things we’d have done anyway (or that were substituting for something we would have done anyway – restaurant A instead of B). There’s been a fair supply of good stuff, and we certainly don’t feel bad when we let something slip by. If you can take it in the right spirit, it’s not a bad thing at all – but like anything, you’ve got to be careful you don’t get wrapped up.

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Chris @cfcents.com April 7, 2011 at 5:54 AM

Great article Neal, I have signed up to get the Groupons offers but have never used them. I find them interesting and if they ever offer a discount on something I truly need I may use the service.

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