Why I'm Shunning Groupon

Shoppers fool themselves into thinking that online coupons save them money.


There's a new tech rally in America. Companies like Facebook, Twitter, Groupon, and Foursquare are attracting millions of new users monthly, and soaring in value. They're also hiring, and restoring a bit of swagger to the hobbled U.S. economy: We may not build much in America anymore, but we've certainly got the lead on social media.

[See 10 industries that will hire the most in 2011.]

But rooting for home-grown businesses doesn't mean I want to become their customer. In fact, Facebook & friends represent an unsettling blend of revolutionary technology and outdated hucksterism. While the people behind these companies have invented brilliant new ways to bring people together, they're mainly doing it to sell them stuff they don't really need. The main reason these new tech darlings have sky-high valuations is that corporate America is drooling over the marketing potential, once they can get access to the millions—or soon, billions—of consumers who willingly join social media sites and share coveted personal information there. In a way, it's just a sophisticated way of peddling toasters.

Groupon may best encapsulate the tension between breakthrough new marketing techniques and the perils of spending in today's economy. The concept behind Groupon is simple: Become a member for free, and you'll get daily emails offering discounts of 50 percent or so on restaurant meals, spas, gardening equipment, fitness classes, and all sorts of other goods and services in your community. In theory, it's win-win-win. Groupon makes money by signing up as many businesses as it can and taking a cut of the deals consumers cash in on. Businesses that choose to join the network use Groupon as a slick marketing tool, essentially offering loss-leader-type deals to get customers in the door, so they can sell them more stuff and generate buzz. Shoppers get to enjoy the addictive thrill of deep discounts, plus the sense of belonging to a special group of insiders getting access to exclusive deals. Groupon seems to have discovered that this "social shopping" experience is more appealing than whatever we did before.

Here's why I'm not interested: I don't want a daily temptation to spend money I should probably be saving. Sure, it's possible that Groupon would one day send me an offer on something I need to buy anyway, saving me a few bucks. But the main purpose of coupons and every other kind of retail come-on—whether delivered by catalogue, email, cell phone alert, or teleportation—is to separate consumers from money they'd otherwise put in the bank. Consumers don't need to be persuaded to buy things they need; the whole purpose of marketing is to convince people to buy things they don't need.

[See some bad advice about 3 big purchases.]

Marketers have done an awesome job of that over the last 60 years, convincing Americans to pay for homes, cars, clothing, gizmos, vacations, children's camps, and hundreds of other things that go far beyond what most of us require to live a satisfying life. They were so successful that for a while, Americans stopped saving money altogether, spending literally every dollar they had. That's great for the economy in the short run, but it leaves consumers saddled with debt and highly vulnerable if something goes wrong. The typical U.S. household, for instance, has racked up nearly $120,000 in debt. Some of that helps pay for basic shelter, transportation, and other necessities. But Americans have also borrowed money to pay for kitchen islands, cruises, BMWs, and closets filled with mall goodies. During the glory days of easy credit, it seemed like it could go on forever.

The recession ended that, and now Americans need to pay down debt and learn the forgotten art of living within their means. Marketers debate whether the "new frugality" is here to stay, or ebullient consumers will go back to their free-spending ways. But it's more a matter of simple math than a question of attitude. There are many reasons to believe it will simply be impossible to sustain the spending levels we've gotten used to over the last decade or two. For starters, banks will no longer lend money to anybody with a pulse, with many consumers only able to get credit at prohibitively high interest rates that curtail their ability to live on borrowed money. To buy a home these days, you need to save money for an actual down payment. Perhaps half of all baby boomers are unprepared for retirement, which means the most profligate spenders of the last two decades have little choice but to become big savers—unless they're willing to accept lower living standards during their golden years.

[See why baby boomers are bummed out.]

Forget about the government plugging the gap, since Washington has its own enormous debt problem. One recent study found that new taxes, which seem inevitable at some point, could reduce the typical American's disposable income by more than 4 percent. That could happen at the same time the government will have to extend the Social Security retirement age and cut back on Medicare and Medicaid subsidies, raising out-of-pocket costs for millions. Plus, the income-tax cuts passed at the end of 2010 will expire at the end of 2012, pushing taxes back up by about 3 percentage points, on average. Add it all up, and the typical family might need to cut its spending by 10 percent or more, just to stay even.

Call me a killjoy, but it seems like a lousy time to be chasing daily deals on manicures or éclairs, just for the thrill of the hunt. Sure, the economy is recovering, but it's not heading back to prerecessionary euphoria any time soon. Unemployment will probably remain elevated for years, and the housing bust that has decimated many Americans' net worth is still far from over. The next five or 10 years will probably be an era of slow growth, stagnant incomes, and digging out. Some Americans seem to realize this, one reason the savings rate has gone from nearly zero in 2005 to about 6 percent today. But that probably isn't high enough. Some economists think it needs to hit somewhere between 8 and 10 percent, and stay there for awhile, in order for Americans to properly repair their finances. If you could save 20 percent of your disposable income, you'd be smart to do it.

Or, you could spend your money whenever you get an email offering a deal that seems too good to pass up. There will be no shortage of offers. Facebook and Twitter are increasingly looking for ways to monetize their services by allowing marketers to target users based on individual preferences, so that instead of getting junky offers that don't pertain to you, you'll get much more tempting come-ons relating to stuff you actually want. Foursquare promotes itself as a way to broadcast your location info in real-time, so you can keep up with friends who might be nearby. But it's also a thinly disguised marketing tool for businesses that want to persuade people to stop in and spend a few bucks instead of heading home with their wallets intact. Groupon's success has spawned clones like LivingSocial, with more probably on the way. All of them want to send spend-now offers to your phone or whatever gizmo replaces it, so they can woo you in real time, when you're as close to the point-of-sale as possible.

[See how we're learning to be happy with less.]

The phenomenal takeoff of such social-marketing sites suggests that marketers believe they can separate consumers from their money as effectively as ever. They may be right. In less than four years, Groupon has signed up 35 million deal-seekers. According to the New York Times, the company's estimated valuation has soared from $1.4 billion a year ago to as much as $25 billion today. Groupon itself boasts that Groupies who cash in on daily offers spend 60 percent more at the retailer than the value of the coupon. Shoppers using the coupons may fool themselves into thinking they're saving money on net, but Groupon knows otherwise.

The tug between spending and saving will bedevil American consumers in coming years, as they debate whether to live for today or tomorrow. Marketers will continue to saturate every empty space with seductive offers urging people to splurge, live a little, treat yourself, and stop worrying so much. But nobody will be sending out regular emails or status updates reminding people to be frugal. It seems like a mismatch. So count me as one lonely consumer taking a pass on Groupon's daily pitch. But for the sake of the economy, I hope the rest of you don't join me.

Twitter: @rickjnewman