Why Groupon hurts businesses and you should be careful

[stevejobs]

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.

[gojomo]

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.

[jerf]

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.

[clayturk]

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.

[stevejobs]

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.

[clayturk]

Really? In what way? There are actually many methods available to track users of said deals and determine who is a repeat and who is a new customer.

You are missing the point of running a daily deal, it is not to increase demand so much as it is to increase exposure. Obviously no business could survive on these deals alone, which is why they are designed to only be for targeted periods of time and to targeted areas. The whole point is to get people in who are already in the market, but are tentative to try something new, or otherwise unknown to them.

Sure someone who buys a massage deal is probably going to buy a massage somewhere, but the beauty of running a deal is you have a better chance to expose that customer to your business instead of where they might have otherwise gone. The same can be said for any business.

Increasing exposure is the point. If this can be accomplished with no money up front(unlike traditional marketing) and with guaranteed usage(unlike print coupons)the business comes out ahead.

[fleitz]

Why not just make the groupon offer profitable and then the issue of discrimination becomes moot. The key to using groupon or any form of marketing is to improve your bottom line. The business needs to be setup in such a way that even if the groupon offer is a loss leader that the traffic generates additional revenue.

[dasil003]

I think this is demonstrably false. The horror stories of businesses not being able to handle the huge flow of customers pretty much prove that many people would not "have bought anyways".

[clayturk]

In the case of certain Deal Providers, the one's who do not give the business much control over the details of their deals, I agree. However, this is not the case with a site called adility.com. They allow the business to control their deals and cut them off when the business so chooses.

You are making the assumption that these businesses only have a set number of regular customers and no idea how to interact with any new customers. Trust that any successful business will know how to and want to grow their business. It is entirely up to them how they handle whatever influx of new business they receive as a result of running a deal.

Additionally, while I agree that there have been a few horror stories, in what way does this prove that the people purchasing these deals "would not have bought anyways"?

The fact of the matter is that the majority of businesses are happy with the end result of running these deals. Most gain a significant number of new customers which more than offset any possible losses they may have had in running the deal in the first place.

The businesses who haven't been happy were either exploited by their lack of research into this growth model, or didn't have control over their particular deal. The latter again being addressed by a few new deal sites out there, adility.com being the first.

[dasil003]

Your response is all over the place and making a lot of assumptions about my beliefs that aren't true. I was only posting a one-off response to unfounded assertion that groupon buyers "would have bought anyway". Don't read too much into it.

[mikeryan]

and should know that whatever money they recoup from selling the deal will at least cover their costs.

I'm not sure if this is possible with Groupon. Between a discount good enough to be accepted and Groupon's cut taken out you'd have to be running an extremely high margin business to still cover costs.

[clayturk]

Which is why WHO you have distribute your deal is so important. If you are a small business, do your research.

Again, I get what you are alluding to, but the fact of the matter is you are only speaking generally, this is possible, and in fact happens every day. Maybe not with Groupon per say, but there are others. If you are a small business, adility.com is your friend.

This model is designed to get mass exposure, but it is ultimately up to the business how massive the outcome will be.

[hop]

Groupon is laughing at this and similar posts all the way to the bank.

Businesses bend over backwards to be on Groupon and there are few faster and cheaper ways to get a flood of new customers to try your service. It may be great for some and not so for others, but if you can't do the back of the envelope math (Posie's cafe) and ignorant to the risk (or success) of potentially 3,000+ people buying your groupon, then you have bigger troubles ahead.

[pbhjpbhj]

Posie's cafe - http://posiescafe.com/wp/?p=316.

[gojomo]

Separately from my on-topic reply: you should consider choosing a login name different than a famous person -- even if 'Steve Jobs' is your real name.

[lrm242]

Why? Perhaps his name is Steve Jobs and he was born before the "famous" Steve Jobs. I'm only slightly kidding here.

[gojomo]

If his name really is Steve Jobs, it would be wise to adopt the use of a middle initial, or at least make a remark acknowledging the coincidence in his profile 'about' page.

Otherwise, even if no one believes it is "the" Steve Jobs, people will have the impression he's a prankster playing off the famous Steve for attention or laughs. (That's what you usually get when someone adopts a famous person's name in a pseudonymous web forum.)

[thwarted]

Michael Bolton: Why should I change my name? He's the one who sucks!

[lrm242]

Of course, we have an rms here, and the intelligent folk of HN know it's not the king of open source. I understand why it might be a prudent factor in making ones decision when registering, but I don't see why we should be tossing around advice to other people on choosing their HN handle.

[gojomo]

Of course, 'stevejobs' can ignore this advice. I'm just letting him know some people will take him less seriously if the name collision isn't resolved or explained. Usually, such pseudonyms are from pranksters.

I think Kevin Fischer's choice of the handle 'rms' for HN was unwise, as well. That he clarifies that he's not RMS on his profile mitigates the faux pas a little. But why squat on such a famous handle? If someone without the initials P.G. could beat PG to registration of the handle 'pg' on some new hacker/startup website, and then use that handle as their own, would doing so be a good idea?

[fabiandesimone]

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.

[michaelbuckbee]

Offering coupons of any kind (Groupon or not) is just another form of marketing. Whether or not it makes sense for a particular business is much more complex: different structures, margins, repeat customers, etc.

So a business "loses" a $1000 with their Groupon deal, they got people into their shop and at least it's a more measurable outcome than most print or radio ads.

[fleitz]

The key absent of measurement is the effect on the business, there is no point to a more measurable loss, in comparison to a less measurable profit.

I don't care to chime in to the debate on whether radio/print/groupon is effective as I think that like most tools it can be used properly or improperly.

[michaelbuckbee]

I'm in agreement with you that the success or failure of the marketing endeavor is execution dependent.

However, I do feel that there is a point to a measurable loss, namely that you know not to do it again. If you spend a $1000 on setting up a Groupon deal and don't make your money back then you very clearly know that it was bad marketing move. If you spend a $1000 on a radio ad it's much more difficult to know what impact it has on your business.

[jkhawaja]

Groupon can be beneficial for some businesses and not so much for others. When restaurants run on Groupon they hardly make money off it. The reason being they have to over staff for the 3000+ people that are going to show up the day after the deal ends. The cost of ingredients equals the value of merchants receivable from Groupon. There is no margin for profit. End of the day if the service is good, new customers will visit that are now willing to pay the whole price. It gets the word out for less known businesses. Takes time but the rewards are fruitful. For other businesses that don't have high costs definitely make good money. It helps people to try out new things. A good example is driving a nascar for an amazing deal.

[symptic]

What makes sense for one company may not make sense for every other. Groupon is great at what it does, so I don't see a point of being critical of something that isn't an expense unless the company opts into it. From my experience, Groupon tries to help you understand full well what you are getting in to.

The truth of the matter is that many business owners don't make the right decision 100% of the time, especially when it comes to new marketing opportunities and trends. Every brand is different, and it's every brand's responsibility to represent itself how it wants to be seen. Blaming Groupon for lowering the value of your brand is projecting your failure to maintain that on a company who offers a great service.

[awakeasleep]

I guess I really don't understand this part of what you wrote:

it may hurt businesses over the long term even if it provides some short term gains.

On their website for businesses, Groupon markets themselves as a sort of loss leader, hurting businesses in the short term, to help them in the long run. Are you thinking that businesses have such huge markups that they make a profit on 1/4 of their usual asking price, and this is letting people in on that secret?

Also, I'd like to know if you've worked with Groupon, if you own a business, or if this is conjecture on your part. I don't have a business, but from what I've read, I don't understand where you're coming from.

[Fred2baro]

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.

[palehose]

At Starbucks, it is more expensive to hire people to stand around making coffee all day than it is to purchase and roast the coffee beans. This is easily recognizable by anyone who knows how to make coffee themselves. The majority of the money you spend when buying a drink goes into that service aspect of the business. Somehow Starbucks has managed to stay in business despite the fact that what they charge is not the "real" cost of a cup of coffee.

[anthony_franco]

I disagree. On that same reasoning, giving a free 30-day trial of a service would be detrimental to a business by anchoring the customer to a 'free' price point.

On the contrary, giving the customer a taste makes them come back for more. As long as your product is actually beneficial.

[dillydally]

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.

[stevejobs]

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.

[dillydally]

Yes, but the reason these brands weren't doing this before Gilt was because they were afraid selling excess inventory at a discount would associate their goods with that lower price-point.

Gilt gets around this by maintaining a semi-private space and having one-day sales.

Groupon isn't private, but it's time-constrained in the same way and for the same reason.

If I know a sale is on for one day only, I'm going to understand that the deal doesn't represent the every-day price.

Besides, we're in the middle of a huge recession. Damn straight people are price sensitive!

[TWAndrews]

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.