Here’s Why Groupon’s Business Model Looks Eerily Like a Ponzi Scheme

Now that Groupon (NASDAQ:GRPN) has gone public, questions and gossip about the company continue. One speculation floating around the Web is Groupon exhibiting all the characteristics of a classic Ponzi scheme.

In a Knewton post prior to Groupon trading as public company, the author stated his with the following:

Groupon (NASDAQ:GRPN) has found that you can get local merchants to try anything once if it brings them new customers. A few local merchants in Chicago get them started, and Groupon shows good revenues. In fact, Groupon immediately remits half of those “revenues” back to the local merchant — they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago’s local merchant community and repeat the trick in other cities.

Unfortunately for merchants, the new customers don’t stick around since the advertised discount is usually a one-time deal. As a result, the merchants usually discontinue using Groupon. Groupon responds by adding new merchants, raising another round of money, and expanding its sales force. This is called a “churn and burn” business model.

Groupon (NASDAQ:GRPN) will work only if local merchants get something back for the cost of extreme discounts. If they don’t, it’s really a Ponzi scheme.

What does Groupon say?

The company believes it helps local merchants grow and expand their customer base. This is the payment for gaining customers through Groupon (NASDAQ:GRPN), and it is allegedly the sales pitch used to close the deal.

Many people looking for a discount use Groupons for many merchants rather than becoming a new loyal customer for any given business. Groupon gets the money from the merchant; however, some merchants might not get back anything in return after the dust settles from a deal.

What do you think? Does Groupon sound like a Ponzi scheme to you?

Don’t Miss: Groupon Analyst Cheat Sheet.

More from The Cheat Sheet