Why Groupon hurts businesses and you should be careful
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.
33 comments
[ 3.3 ms ] story [ 63.5 ms ] threadFirst: 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.
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.
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.
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.
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.
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.
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.
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.
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.
Your argument applies equally to Gilt, but I don't think people are going to start paying less for Diesel jeans.
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!
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.
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.)
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?
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.
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.
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.
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.
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.
On the contrary, giving the customer a taste makes them come back for more. As long as your product is actually beneficial.
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.