Rip-offs And Cons With Group Buying Services Like Groupon

Groupon.com and a host of similar group buying services offer an innovative way to save for the average consumer.  However, with the emphasis on paying up front, there is real risk to the buyer.   I’ve previously discussed some of those financial risks but there is one additional issue that worries me; it’s unscrupulous con men taking advantage of the system.   There is a potential for these sites to become an active breeding ground for criminals; since it is such an easy and low cost way to set up shady deals.

I have been following Groupon.com for over a month now, trying to analyze the types of “savings” that people were raving about.   I recently found one featured business that promoted $49 for their services.   So far they had almost 80 people signed up yesterday.   The buy limit to activate the Groupon is 400 people.   That’s $20,000 in upfront money.   Today, they have 2,048 people signed up for over $100,000 paid to the advertiser.

I will be frank.  There’s no way that I would have signed up for this particular Groupon.

Why did I think it was a con?  The main ad words look legitimate and benign but when you look at the details written on the ad (fine prints that no one reads), it sounds like a Nigerian email con.    I’m serious.   They were just throwing random sentences in there to fill in the space.   The stuff was so outrageous that you can’t take it seriously.

As for the ad itself; how many people really believe that if you accidentally swallow a seed, it could actually grow in your stomach and kill you?  Furthermore, do you really believe that a body massage would cause a swallowed seed to become inert and stop growing?   Well, over 2,000 people believed it and paid money to the people who created this Groupon promotion.

The other thing that concerned me today is about the Groupon process itself.   The ad was up for 2 days and only received 80 purchases yet suddenly within 18 hours, the purchases jumped by almost 2,000 people?  That’s just so questionable for me.   How real are those numbers?   How much are they inflated in order to legitimize processing the 80 people who signed up for the previous two days?

Not everything promotion on Groupon is a scam of course.  Over the past month, I did see many legitimate companies running Groupon promotions, but even then the savings were only around $2-10 dollars and involved offers that I would not normally purchase.   The “higher” savings were often connected with restaurants, but even then I get better deals through their regular specials without having to pay money upfront.  I also prefer to choose a restaurant based on my personal preference at that moment, rather than based on a pre-paid coupon.

How does Groupon and other group buying sites make scamming so easy? Take the offer I talked about above; for a $100,000+ payoff, all it takes is $200 in investments to fake a site and a couple of Yelp reviews.  If you do it in bulk over multiple Groupon locations, the costs of creating the fake information drops down even more.   That’s a pretty good return on investment.

AOL Finance recently wrote about a photographer who faked her site by copying other photographers’ work and posting it on her site.  She got 1,175 people to pay for a service that couldn’t be delivered.   The time limit was so short that it was impossible to do the photo shoots for all the people who signed up in addition to the fact that she couldn’t take good pictures.

Summarizing the story, here is a recap on how to con people using Groupon:

Step one: Set up a PayPal account. Step two: Build out a fake website and get a phone answering service with a voice message — or multiples thereof. Step three: Buy a fake yellow pages listing. Step four: Post fake Yelp! reviews and ratings. Step five: Offer your Groupon deal. Step six. Collect your check and disappear before anyone’s the wiser.

As with anything involving money on the internet (and in real life), the best advice is caveat emptor, “let the buyer beware”.   Go and physically check the location of any services that is being offered on Groupon before you pay out money.  Kick the tires extremely hard.

Think of this question before you buy, “Do I really want this bad enough to pay money upfront or is it a whim?”   The answer may save you hundreds of dollars over time.

© 2010 MoneyandRisk.com all rights reserved

small> photo credit: Victoria Fee

10 comments

  1. Pretty great blog. I just came upon your blog and wanted to point out that I have honestly liked reading your web-site posts. I’ll be opting-in to your rss and I hope you publish another post again shortly!

  2. Hmmm the only problem with this analysis is that groupon does not payout the money directly to the business right away. So there can be no “collect the cash and disappear”. The money is released over stages as the groupons are redeemed.

  3. You do bring up some good ideas and seem to be pretty well informed, however, correct me if I happen to be wrong, but you never brought any hard proof of scams conducted successfully vis-a-vis Groupon, just a theory and methodology to do so.
    Take the massage example you gave. Did you investigate into whether the people who bought that Groupon actually felt scammed? There are a whole bunch of people with a great variety of viewpoints on what they consider “valuable” out there.
    I would assume that a company such as Groupon, with such a large vested interest in quality of service to complete their due diligence on the businesses they work with.
    Thanks for your thoughts, it was an interesting article.

    1. Thanks Gabe, I actually called various companies that were advertised on Groupons and checked some local ones that had huge offers. They were tiny places that couldn’t possibly deliver the sheer amount of services that they offer.

      The issue comes in with these offers that have a deadline. Service companies in particular. One company was a chiropractor’s office offering massages. This is in addition to their patients. There is only one person doing the service but offers of 1500 massages. Yes, they will eventually get to you but who knows when. Will you actually want the message 3 years later or remember.

      Then there was one where no one ever answered the phone that was listed on the Groupon and there was no physical address. The website was a one page link, basically a pdf file thrown up.

      All I can do is point out areas of risk for our readers to consider when they spend money.

  4. Our business recently contacted several of these group buying services (Groupon , Living Social, and Dealfind. They all wanted a 50:50 split on the revenue!! This means if we offered a standard 50% discount deal to the public we would receive 25% (less POS charges). We simply do not operate at these kind of markups.

    1. Jody,

      What I have found with some companies is that the service or deal offer is something that was super cheap and the Groupon amount was already marked up to cover the costs and their cuts. It’s meant to be a loss leader similar to the big guys when they offer sales deal. The hope is that you will buy something else at regular price.

      There’s one offer I saw (after comparing details) that with Groupon is more than their regular service. It’s just named differently. In the end, the “discount price” ends up being more than another identical service (but different name).

      This article is a shopper beware focus but business owners, as you point out, have to watch their profit margins too. Jumping on the bandwagon without calculating your costs and profits can put a company into financial hardship.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>