This isn't anything new to Groupon. For as long as I can remember companies advertise many of their sales based on MSRP, or a jacked up initial price. Heck, I get coupons in the mail all the time from local and national pizzerias offering things like, "Large Pizza, Breadsticks, and 2 Liter for $20.99" when ordering each of them individually adds up only to $19.99. Many of Wal-Mart's "New Reduced Prices" are only $0.10 cheaper than the original price.
I guess the moral is that as long as people fall for it companies will continue to take advantage of the public's innate desire for "a great deal."
Off topic, but am I the only person that finds it annoying when company blogs don't provide an easy link back to their website? I understand wanting the header logo/name to lead to the blog homepage, but it still seems sensible to include a good link somewhere.
I've not found that to be the case. Usually I find that the sandwich and <size> fries will add up to, for example, $4.79, and adding a drink is another $1.59, but the combo price is $4.99. You're paying an extra 20 cents or so for the drink, which is IIRC still less than their cost for the soda, but I might be wrong in today's dollars. In 1990/91 when I worked at a Burger King, our food cost price for a medium soda was 5 or 6 cents, which included the cost of the cup/lid/straw and estimated "average" number of refills. I imagine its somewhat more in 2011, but possibly still under 20 cents.
Note well that this post is from a service that (a) competes with Groupon's value proposition and (b) appears to exist to provide the market intelligence they're arguing from in this post.
Hi Thomas, definitely agreed on the first. Our bidding model competes with Groupon's value proposition in the local services industry (hence our repeated plugs for the low rates you can find through a bidding site). We just think we can often find consumers a better deal than can be found on lots of daily deal sites.
As for the market intelligence, we're not a data provider. Actually, this is the first post we've ever written that surfaces any of the data we have. We have a data set that is pretty uncommon.
Market rates for local services are generally very opaque. We think the data we have on market rates for local services can be helpful in many ways (like this) to consumers.
Groupon sells marketing. The daily deals sites, and everything on them, is finely honed marketing.
It's a beautiful psychological play. The % off, the timer, the social pressure - an automated version of the used-car salesman pitch. It doesn't matter what the absolute price is - studies have shown the consumers are more willing to buy a product that is at its "everyday low price", even when it's that price... every day.
In fact, I wouldn't be surprised if the deals had special "Groupon only" pricing. Gilt Group went through this a few months back with their "Made for Gilt" specific items - they were selling inventory which had ridiculously inflated "retail prices" pulled out of thin air.
I too find it annoying when company blogs do not link back to the company's own website. I read the article and wanted to learn more about Thumbtack. I don't MIND typing it in, but I should not have to...there should be an obvious link on the page.
Doesn't Groupon target the somewhat higher scale part of each market (e.g. well-known restaurants)? Wouldn't this explain the higher-than-average prices, since those averages are computed over the whole market?
Of course it isn't a good deal. In order to make money on groupon your "standard" rate needs to have a profit margin of 200%.
Advertising costs money so whenever something is "advertised" you're going to pay more unless the advertising generates enough business to get an economy of scale greater than the cost of advertising. Advertising makes a lot of sense when you have something with high capital costs but low per unit costs. (Think CPUs or software based businesses). When you're buying a service such as cleaning where most of the costs come from labour it's going to be difficult to generate an economy of scale great enough for advertising to pay for itself. In businesses with out great economies of scale the increased cost of advertising is going to be passed to the consumer.
You're always going to get a better rate on a service business by doing a little leg work yourself and cutting out the "middle man".
Hype and promotion to the contrary, the place Daily Deals make the most sense isn't in driving more people through a lower-margin but still-profitable offering. It's as a substitute for local advertising, which is for many businesses akin to just flushing money down the toilet.
Sensible Groupon offerings don't have to make money, or even fail to lose money. They just have to do so within the bounds of a marketing budget, and provide a better ROI than what the budget would have gone to otherwise.
Actually, sensible groupon offerings DO have to make money (in the long term, or short term if you don't have credit).
The amount of money a rational organization should spend on negative ROI activities is exactly zero. It's just as stupid to spend your money on a -25% ROI as it is on a -50% ROI, you'd be better off putting the money in a GIC.
What the parent meant is that these kind of offers make more money long term. Partly by exposing your business to new customers, and partly by the simple fact that many people see your company name.
So if you set aside a 10k yearly advertising budget, offering deals which make you lose 2k is perfectly reasonable - if you think the exposure and new customers are worth it. The advertising budget is already accounted in the yearly ROI, so you don't have to worry on each deal's bottom line being in red.
I think what is particularly interesting about the data surfaced in this article is the baseline prices from Groupon et al are so grossly exaggerated in this particular vertical (service industry).
For the service industry in particular, hourly rates can vary drastically by geography and type of business, whereas for spas, restaurants, or other store-front businesses, it's clear whether or not you're getting an actual deal/coupon because you can compare the deal to the base menu or pricing packages.
This happens for products as well. There was a controversy with FTD over flowers because the discount was based on the full prices, but the normal prices shown on the website was a sale price.
I guess the moral is that as long as people fall for it companies will continue to take advantage of the public's innate desire for "a great deal."
Off topic, but am I the only person that finds it annoying when company blogs don't provide an easy link back to their website? I understand wanting the header logo/name to lead to the blog homepage, but it still seems sensible to include a good link somewhere.
Edited to show the on-topic stuff first.