Stop Giving it Away For Free and Start Creating Brand Value

Price discrimination is an excellent point. I guess the trick is to enable price discrimination without lowering the value of your brand, so the coupons or whatever would have to be sufficiently annoying to use so not everyone would use them.

Your last point is the rub -- Groupon's creating a "heavy discount" mindset with consumers that often transcends product loyalty.

Groupon's focus is local service businesses, which, if they're smart, can offset the initial discount with upsells (think liquor in a restaurant).

For more commodity type products, there's limited upsell opportunity, so you're very vulnerable to price sensitivity. And price sensitivity, as you point out, will increase if the market is saturated in deals.

It will be interesting to revisit this in a year or so, as the economy turns around, and see if Groupon and others have had to change tactics.

Brand is about perception. Value is about perception.

Look at wine. Studies show that people enjoy the _same_ wine if they pay more for it. Is that deception? Intrinsically, why does one bottle of wine cost more than the other? Because it's _better_? What exactly makes one bottle of wine better than the other? It's very subjective.

When it comes to products/service that are more quantifiable perhaps the better argument can be made. But that's almost never possible. Businesses distinguish their product/service by other factors that are not easily quantifiable (eg. better customer service, better user experience) that add value.

I think deception is the wrong word to use but certainly consumers can save a lot of money by simply being educated about what they're buying (eg. buying the generic version of Claritin/drugs for 60% of the price).

A brand is not deception, it's having people trust what you say. Anyone can say that their software is easy to use, but most people won't believe you. Apple, Google, 37signals, etc have brands that people trust and people believe that their message will match reality. I trust Dropbox to work, but no other sync product has built a brand strong enough that I would even bother looking at them.

Said another way, brands are an ecosystem of response to a company's product and marketing. Despite kajillions of dollars spent on advertising, a lot of Microsoft's brand is BSOD, Vista, Clippy and constant restarts. Despite objective safety numbers and no evidence of failure, people trusted Toyota less, billions of dollars less, when the brake/accelerator "story" was happening last year.

A brand is what people expect to get. The $2.99 corn flakes, even if they are as good as Kellogg's, are dragged down by every other crappy generic cereal a customer has ever eaten.

"If not, that sounds like a dysfunctional market."

No, it is not a dysfunctional market. People are perfectly willing to pay more for the perception of increased quality.

In terms of classification, this means that the firms in the market are in monopolistic competition.

Here is a halfway decent Wikipedia page on the topic:

http://en.wikipedia.org/wiki/Monopolistic_competition

Real world markets where brands are important are not so much dysfunctional as less than 100% transparent. Remember, that for most product categories, consumers don't want to spend a lot of time researching alternative offerings. They use brand as a proxy for relative levels of quality.

>Is the product actually better? If not, that sounds like a dysfunctional market.

Everything else being equal, marketing is just propaganda that makes the market less functional. And a "strong brand" is the result of successful propaganda.

I don't think the business idea behind Groupon is growing less popular - more likely, they're suffering from the effects of so many people copying them. Every local newspaper site I read now has a '50% off deal coupons' feature.