Why Groupon hurts businesses and you should be careful

#1

Post by stevejobs » Sun, Sep 26, 2010, 4:57 PM UTC

I know this post will be controversial, but I stand by it nonetheless. I think that Groupon and its ilk hurt businesses more than it helps them by devaluing the product or service they are trying to sell. It emphasizes price (aka huge savings) as the determining factor in choosing to make a purchase. Rather than win over customers because you have a superior product or service that is worth the regular price, the Groupon coupon shows to customers how much margin you have to work with and will anchor their future purchases off that initial discounted price.

What this means is that customers, especially new customers, will forever know that the stated price is not the "real" price, but a much lower amount even if it is in reality a loss for your business. For example, if a service is normally priced at $50, and you now offer it at $25, your customers, even the ones who don't go for the deal, will now think the "true" price is closer to the lower price than the previous price.

They will resist buying unless the price is adjusted downward even if in actually you never intended for the price to go that low. Moreover, these deals bring out those customers who prefer deep discounts and have weak loyalties to any one business that isn't giving them bargains.

While Groupon is a startup success, its long-tern proposition is questionable because it may hurt businesses over the long term even if it provides some short term gains.

Re: Why Groupon hurts businesses and you should be careful

#2

Post by fabiandesimone » Sun, Sep 26, 2010, 5:19 PM UTC

I think you are mixing concepts.

First: new customers will forever know that the stated price is not the "real" price but a much lower amount I think the "real price you are referring to is the production cost, which generally (unless is subsidized) is lower than the sales price.

Second: if a service is normally priced at $50, and you now offer it at $25, your customers, even the ones who don't go for the deal, will now think the "true" price is closer to the lower price than the previous price

What is exactly the "true" price? As far as I know an item is worth whatever someone is willing to pay for it.

The only thing I can infer from your sentence is that a set of customers that won't even buy the product at discounted prices, have not yet obtained value from your product. Which can be in itself a great insight to work on the message of your product and hopefully be able to transmit value.

I think, that if anything, Groupon is a great way to flush out the low value customers from a CRM pyramid and focus on medium value customers and turning them into high value ones.

Re: Why Groupon hurts businesses and you should be careful

#3

Post by Fred2baro » Sun, Sep 26, 2010, 5:21 PM UTC

You got a point, but a Brand is a bunch of products. You can bring the buyer in the store because of a coupon, if he comes back, it's for the service that you showed him in that store.

So the coupon is good to bring the customer closer to the place where he can listen to the message of the Brand. So you're right about the price, but the income are always coming from the relationship, in any case, you won't have a chance to build that relationship if the customer prejudges you as an expensive brand.

Re: Why Groupon hurts businesses and you should be careful

#4

Post by clayturk » Sun, Sep 26, 2010, 6:13 PM UTC

The idea that providing a deal or deep discount will somehow reveal your price points, making people demand product at that price is ludicrous.

When a business structures a deal of this nature they are doing so with their bottom line in mind, and should know that whatever money they recoup from selling the deal will at least cover their costs.

The main idea behind running these deals is to get new business in your door while minimizing the cost of advertising and promotion. It is up to the business how they choose to retain this new growth, and most businesses employ great customer service and or a slew of other great products at full price.

As Fred2baro said, this the businesses chance to engage with a customer you would of otherwise had no access to. That in itself seems worth offering something at cost one time to that new customer.

In the case of a restaurant, this is no different then the traditional offering of a "2 for 1" or a "50% off" deal through traditional media. In both of those situations the restaurant is showing their "real" price, as you said, to the would be customer, but with no guarantee of use. This is where the daily deal truly shines, for in order to take advantage of the deal, the would be customer has to put up money, i.e. purchase the deal. Talk about a brilliant incentive to get someone into a business, they are paying the business for the chance to win them as a new customer. As a business owner, I don't understand how this could be a negative.

Re: Why Groupon hurts businesses and you should be careful

#5

Post by TWAndrews » Sun, Sep 26, 2010, 6:35 PM UTC

This is a plausible theory. However, there are equally plausible theories that have a Groupon promotion functioning as a loss-leader and reaching a much broader customer base than a company's traditional marketing otherwise would, with some Groupon purchasers becoming loyal customers.

Either of those are possible (and I'd say it's highly likely that examples of both exist amongst the group of companies which have offered Groupons). The telling thing would be the data, which would resolve it pretty definitively for any giving promotion.

Re: Why Groupon hurts businesses and you should be careful

#6

Post by jerf » Sun, Sep 26, 2010, 6:46 PM UTC

Your post proves too much. It proves all discounts are a bad idea, a concept I do not think I really need to sit here and disprove at length.

Also, Groupon does not create a "price emphasis". To a first approximation, all economic actors are always price sensitive.

I could argue with you at length, but it would be of a length exceeding a friendly HN post. I suggest some time with a microeconomics textbook. There are free ones on google if you search for "microeconomics textbook". I'm not trying to be snarky, it's just that the alternative of basically pasting an extemporaneous one in here is not really that friendly.

It may be true that Groupon hurts businesses, but this is not any of the reasons why. The reasons why would have something more to do with having costs that exceed benefits, not that the idea is intrinsically bad.

Re: Why Groupon hurts businesses and you should be careful

#7

Post by dillydally » Sun, Sep 26, 2010, 6:52 PM UTC

There's a reason the deals on Groupon last only a day.

Your argument applies equally to Gilt, but I don't think people are going to start paying less for Diesel jeans.

Re: Why Groupon hurts businesses and you should be careful

#8

Post by stevejobs » Sun, Sep 26, 2010, 7:06 PM UTC

dillydally wrote: post #7

There's a reason the deals on Groupon last only a day. Your argument applies equally to Gilt, but I don't think people are going to start paying less for Diesel jeans.

Gilt and its clones don't sell regular merchandise, but almost always out of season, overstock, and seconds merchandise that the firm would have to dispose of regardless. Businesses that use Groupon deep discount their normal stuff.

Re: Why Groupon hurts businesses and you should be careful

#9

Post by stevejobs » Sun, Sep 26, 2010, 7:11 PM UTC

clayturk wrote: post #4

The idea that providing a deal or deep discount will somehow reveal your price points, making people demand product at that price is ludicrous. When a business structures a deal of this nature they are doing so with their bottom line in mind, and should know that whatever money they recoup from selling the deal will at least cover their costs. The main idea behind running these deals is to get new business in your do…

Subsidies like these are inefficient for businesses because they don't discriminate between customers who are new to the business and regular patrons. It doesn't really increase demand so much as pull it forward a la "Cash for Clunkers" meaning you are subsidizing customers who would have bought anyways.

Re: Why Groupon hurts businesses and you should be careful

#10

Post by gojomo » Sun, Sep 26, 2010, 7:14 PM UTC

This is not specifically an argument against Groupon, but with occasional discounting in general, such as seasonal sales. Economists, marketers, and business strategists have studied and argued about this for decades.

So, some businesses avoid discounts, and others embrace them. It probably depends a lot on the type of business whether they're a net positive or net negative; otherwise either the "sales are bad" or "sales are good" argument would have definitively won out by now as accepted wisdom.

Small businesses are often unsophisticated in their marketing, so Groupon probably benefits from some businesses not realizing discounts hurt their exact business, or overpaying for Groupon promotions. (Similarly, Google benefits from small businesses that sometimes overbid on AdWords/AdSense without rigorous ROI calculations, or fail to adjust their campaigns to eliminate negative-ROI outlets.)

But other businesses -- those that get a large benefit from awareness, and some number of new recurring full-price customers -- surely benefit. There will be some optimal frequency of promotions, to minimize their cannibalization of normal demand at full price. (Ideally, you'd want to offer the promotion only to new customers, but that would require some information-discrimination that's hard on the net, with promotions that are meant to spread like gossip.)

Groupon will be in a very interesting position, as they collect data on what works for different businesses and what customers respond to. They could tempt more businesses to overpromote, or help unsophisticated small businesses schedule optimal promotions. They could possibly deemphasize certain promotions to repeat customers, or emphasize them to proven customers of competitors.