It’s been stormy summer for Groupon, a daily deal website and once darling of Wall Street. Since June, Groupon’s web traffic tanked by 50 percent, its IPO is on the rocks and a judge just green-lighted a false advertising suit filed against the company. Still, Groupon can celebrate one victory: a thumbs up from the North Carolina and South Carolina Bar , which each found that Groupon’s mechanism of collecting payment for coupons purchased for legal services and sharing the proceeds with sponsoring lawyers does not violate the ban on fee-splitting. [H/T Larry Bodine at Law Marketing Blog; see also Steph Kimbro's Virtual Law Practice for extensive analysis of both ethics decision].
Still, Groupon’s potential fee-splitting issues that the bar decisions resolve are the least of its problems for lawyers. In my opinion, the ethics decisions are a no-brainer: regulators have no choice but to lighten up on performance-based online advertising (like Google Ads) where participants pay only for results. If not, small firms won’t be able to compete online with large shops which will always have the resources to pay out of pocket for ads and directory listings. So I never got too excited about Groupon’s ethical implications. Instead, I wouldn’t recommend Groupon because the business model simply DOES NOT WORK!
For those unfamiliar with Groupon, let’s take a step back. Groupon’s appeal to small business derives from the fact that they don’t pay an upfront fee to participate. Instead, merchants submit a “daily deal” – usually at least fifty percent less than full retail price. Groupon then approves those deals calculated to be profitable and distributes those accepted to a list of tens of thousands of consumers within a particular geographic area. Sounds good, so far.
Unfortunately, what most Groupon users forget in their excitement at getting so much face-time in so many email in-boxes is that at some point, they’ve got to pay the piper. And pay they do, through the nose. Groupon takes a 50 percent cut each time a customer purchases a daily deal, the merchant with just a quarter of the cover price of the offering (e.g., a daily deal that’s $10 for a $20 meal at Joe’s Cafe means that Joe gets $5 and Groupon gets $5). Not much of a margin for the merchant.
So why do it? Well, Groupon touts the potential for repeat business as a benefit of offering discount (which sounds a lot like one of those dubious make it up in volume arguments). Still, at least one research study found that Groupon doesn’t lead to as much repeat business as claimed. Moreover, the prospect of repeat business comes at the cost of jeopardizing one’s existing business. One cafe owner nearly went bankrupt – and was forced to fork up $8000 of her own money – just to make good on the deal that she offered on Groupon.
But bad as Groupon is for small business, it’s an even worse deal for lawyers. Lawyers don’t get much repeat business from the types of one-off services like wills or incorporations that are suitable for offer on Groupon. And even if that work did produce repeat clients, lawyers probably wouldn’t want them anyway because they’re likely to continue to expect discounted rates, as Jeff Korhan points out.
Lawyers also can’t expect the potential, albeit tiny windfall that might come from Groupons that customers purchase but go unused (e.g., a customer buys a Joe’s Cafe groupon but never eats there which means that Joe gets $5 for food he never served). That’s because lawyers aren’t relieved of their ethical obligations (in jurisdictions where applicable) to treat Groupon payments as advances that must be deposited into the lawyer’s trust account and disbursed only when earned. From the North Carolina opinion:
Second, a lawyer must deposit entrusted funds in a trust account. Rule 1.15-2(b). The payments received by the lawyer from the website company are advance payments1 of legal fees that must be deposited in the lawyer’s trust account and may not be paid to the lawyer or transferred to the law firm operating account until earned by the provision of legal services.
[Note - some jurisdictions treat pre-performance flat fee payments as earned on receipt rather than as advance payments that must go in trust accounts].
Lots of legal futurists and “thought (or in many cases, thought-less) leaders” will applaud the North and South Carolina decisions as a sign that bar regulators are finally acknowledging the “new normal.” Don’t get me wrong, I also think that the regulators got it right this time. But lost in the hoopla over Groupon’s ethics victory is any meaningful discussion about whether Groupon is actually an effective platform for lawyers – or a black hole that could might them to lose their shirts filling orders for $99 wills for six months, when they could have used the time to lay the foundation for finding clients who need $9990 — or even $990 — estate plans. With all due respect to my buddy Scott Greenfield, it’s a sad day when a practicing lawyer like him has to dissect the financial wisdom of participating in the newfangled schemes like Schpoonkle (lawyer bidding site) that are cropping up like weeds because the law practice management gurus and marketers who are supposed to understand the economics of law practice simply give a thumbs up to every half-baked idea cloaked in a shiny 21st Century robe instead of subjecting it to rigorous analysis.
Which is not to say that we should dump on new ideas simply because they’ve never been done before. As you might have guessed, I’ve never thought much of Groupon for lawyers. However, I’ve supported sites like Avvo (because ratings are an inevitability and Avvo makes disciplinary information accessible), UpStart Legal, a more sophisticated, unbundled service provider and even Lawyer Up , a legal triage kind of concept. I’m certainly not the only blogger who subjects these tools to scrutiny. Take note of Mark Bennett’s devastating review of Yodle websites (not just deceptive but utterly mediocre and overpriced) and Lawyerist‘s multi-post critique of the company’s ineffective practices. [by the way, if you've done a solid post on a lawyer product, send me an email and I'll give you a link too]
Guess what? Analyzing the pros and cons of new tools — and even rejecting some of them as non-viable — doesn’t make us stodgy naysayers. TechCrunch, the go-to site for coverage of new technology companies, is hardly what I’d call old-school. Yet Michael Arrington (a lawyer) and his staff offer the type of detailed, considered reviews — sometimes pro, sometimes con, often both– that so many legal sites utterly lack (I mean, really, when’s the last time you heard a social media guru criticize any kind of social media tool for any purpose?)
Ultimately, a marketing practice that isn’t ethical is a non-starter. Even so, just because the bar allows lawyers to use certain marketing tactics doesn’t always mean that we should. It would be nice if solos had access to more reasoned and robust analysis of the marketing services instead of a bunch of empty hoo-yeahs.
Update – Ask and ye shall receive. After I asked for other insightful reviews, Trial Warrior Antonin Pribetic tweeted me his exhaustive and probing critique of sites like LawPivot and Quora which have yet to produce real business for real lawyers, at least the last time Bob Ambrogi looked.