http://online.wsj.com/article/SB10001424052970203710704577054613912424388.html?mod=WSJ_Tech_LEFTTopNews

http://www.businessinsider.com/london-baker-makes-102000-cupcakes-groupon-deal-2011-11

http://www.businessinsider.com/groupon-crashes-through-ipo-price-2011-11

By now readers will have seen stories about Groupon’s stock tumbling due to overall market concerns, e-commerce market concerns, competition, and short selling.  However, the media seems to be missing an even bigger story: the way Groupon executes its business model is not working out for small business.

For some bizarre reason a bakery decided to advertise a massive 75% discount for cupcakes.  The bakery ended up selling a dozen cupcakes for $10 rather than $40.  Here is the rub, the baker’s costs did not change.  In fact what Groupon seems to forget to advise their retail business customers is that their costs never change so they should be careful how much they discount.  Keep in mind that Groupon takes a huge cut of the coupon’s value as well.  So Groupon gets paid no matter what while the retailer business customer loses a fortune.  Oh my, this sounds like a stock broker; they make money when you buy the stock and dump the stock (even at a loss).

It is true that the small business owner should have been able to figure out the math in advance.  However, Groupon’s allure for these small business owners is the belief that the bigger the discount the bigger the sales.  The only problem is that the retail business customer’s operating costs do not change.

Groupon’s business model will work if it reduced its cut of the action and actually provided some value added advice to their business customers by advising them properly.

Does Groupon want to help its customers? Then Groupon should provide customer service to the retailers.

Groupon has done a disservice to the online discount business.  It is beginning to look like a scam.

Small business owners need to understand that the value of companies like Groupon is their advertising capabilities.  However, what small businesses need to understand is that the greatest value added advertising assets available to them are most likely their own town newspapers and quite frankly word of mouth.  For those small business operating in large urban centers, you would be surprised how well word of mouth functions.  It is about getting the biggest bang for the money.

As of November 23, 2011, Groupon's stock price has crashed below the IPO. I guess investors are asking the right questions.