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Comment by raganwald | Hacker News Reader

First, I agree that this is an insightful observation, and it certainly applies to conventional suppliers. For example, if demand for yoga classes drops, the demand for professional-grade yoga mats will drop.

But a businesses like an advertising agency or coupon distributor is not a conventional supplier: It exists to create demand for things people don’t think they need. In times of austerity, it’s true that “organic” demand drops. But that can increase demand for businesses that create demand out of thin air.

When the class is full, nobody needs to distribute a coupon. But when the class is half-empty... Perhaps Groupon will get the call. Perhaps.

I am not endorsing Groupon, just trying to point out that since they aren’t a yoga business or a conventional supplier to a yoga business but a business that throws a lifeline to a yoga business, their economics may not exactly track yoga business economics.

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There's another factor though - in a down economy luxury goods and services tend to get squeezed. Prices will drop, margins will decrease.

What the Groupon model wants to do is throw a 50% discount on top of that. When times are good, margins on luxury services may be enough to let this slide as a marketing expense. What about when times are bad?

Makes sense when you’re selling bikes... a 50% off coupon only makes sense if your margins are 50% to begin with. But when you’re renting bikes, you have already sunk the cost of the bikes and are now looking to extract value from excess capacity. So the economics are different.

Or getting back to Yoga, it’s hard to offer 50% off your price for Lululemon clothes if you’re already discounting your prices to match the economy. But if you have a Yopga studio, your rent has already been paid. If you only have 10 people booked for a class that can hold 20, a coupon deal for ten more people may seem attractive.

Especially if Groupon fronted you the money for the attendees out of the capital they’re raised.

(Still not endorsing Groupon the company, just trying to be “fair and balanced” and make sure we’re looking at all of the factors in play.)

Times are bad....

And yet Groupon obviously is doing alright.

Using your logic, shouldn't one be bullish on Groupon considering it'll make MORE money once the economy improves ? Using your logic of course....

My real problem with all this negative talk is that it's become a fad.

Groupon is gonna crash! It's a ponzi scheme! It's not worth anything!

Since so much sentiment is against Groupon, I tend to favor it more. Don't get me wrong, they've had a lot of problems, but it's definitely not the total disaster so many make it out to be.

Don't forget that contempt and fear are just as irrational as exuberance and greed.

It might be a fad on the day of the IPO, but if you break Groupon's business model down to its essential elements, it requires a huge number of leaps of faith to rationalize its competitive advantage and revenue potential. Goldman Sachs says they predict 40% growth year over year for the next two years. That sounds extremely fishy to me, given the already-dubious value of the service, the low technical and financial barriers to entry, the lack of loyalty from merchants and consumers alike, the allegations of crooked books, the early cash out for founders and investors, etc., etc. Too rich for my blood, I guess.

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