Reality of Group-Buying

I have no data to test the following hypothesis, but I suspect that a significant portion of Groupon revenue comes from deal hunters.

These are people who love to find a deal, and if they went shopping and found an item with a great price on the tag, they still wouldn't feel excited about buying it unless it were ON SALE.

If this hypothesis is true, these people go from deal to deal on groupon every week. They surf the hottest local deals, but the only company loyalty they have is to Groupon themselves.

Who know's, maybe I'm wrong. But if I'm not, local spas and restaurants will eventually wise up.

That's quite a misapplication of micro theory. The supply-demand diagram doesn't apply (very well) in cases without complete information, for instance. For example, there are many customers who aren't even aware of the businesses being advertised. That's the premise of Groupon--not to get existing customers to come back more, but to get new customers who didn't even know about the businesses.

I'm not saying that this is effective--the only way to know for sure is through testing, which I'm sure Groupon can do, but I'm bothered by the author's manipulation of micro theory.

This post is an econ student's way of saying:

"It's hard to grow profits by selling to cheap people."

I do think there are situations where Groupon makes sense - primarily where you have a high fixed cost (like rent), high margins on the product (say, liquor) and poor utilization. The only time that's likely is with a new business, because it's not a stable state -- either you grow out of it, or you go out of business.

The problem is that Groupon, while attracting customers, also attracts customers who are more price sensitive, less loyal and have lower price expectations for the future. That's not as good as getting the customers the hard way: finding people who value your product enough to pay the normal price, and are happy with it.

Hate to respond to pedantry with more pedantry, but that's a pretty questionable application of micro theory.

The main value of using Groupon is that in exchange for offering a deep discount, you get the firehose turned on your business - it's a customer acquisition tool, using equal parts advertising and pricing. Businesses wouldn't get the same demand spurt by offering discounts without using Groupon.

What the author gets right is that it's an open question as to whether merchants can convert the discount buyers into regular customers.

Groupon is primarily good for discovery, but it's up to merchants to capitalize on referrals from their Groupon customers. It works particularly well for small operators who need to put a quirky business on a map.

For example, a friend who lives in San Francisco bought a Segway tour of the city, which she would never on earth do had she not seen it on Groupon. She then asked 50 people to join her tour, and then plastered the photos all over Facebook. A lot of people now know these tours exist, and next time we have friends visiting from out of town, we'll be asking her about it. If the Segway tour operator had offered her a promo for referrals, all the more reason for us to remember the tours and book, preferably via her referral link.

I suspect the effect is similar to getting your startup covered in Techcrunch. Suddenly you get tons of pageviews and signups, but it's up to the startup to keep people coming back.

I don't agree, I don't see the value for businesses in a fundamental shift in the demand curve any more than 1 euro hamburgers have that goal. Getting more customers in the door is a customer acquisition tool, hopefully getting those customers to return; or even better, upselling them something. It's not part of a fundamental change in pricing strategy, it's a short-term marketing tool.

I've been taking macroeconomics and one of the questions asked, "Do you think this is a good model to explain this phenomenon?"

My answer? "If a two variable equation can explain things that PhD/MBA's with 20+ years experience don't get, yes."

Economics is very valuable but, imo, mostly on a higher level.

Businesses should use Groupon to bundle deals, not selling single items for deep discounts. This increases a businesses' volume and transaction costs go down per sale.