
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.<p>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.<p>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.<p>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.
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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.

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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.

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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.

~~~
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.

------
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.)

~~~
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?

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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.

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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.

