Why Groupon hurts businesses and you should be careful

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

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.<p>Also, Groupon does not create a "price emphasis". To a first approximation, all economic actors are <i>always</i> price sensitive.<p>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 <i>trying</i> to be snarky, it's just that the alternative of basically pasting an extemporaneous one in here is not really that friendly.<p>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.

The idea that providing a deal or deep discount will somehow reveal your price points, making people demand product at that price is ludicrous.<p>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.<p>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.<p>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.<p>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.

Groupon is laughing at this and similar posts all the way to the bank.<p>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.

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.

I think you are mixing concepts.<p><i>First: new customers will forever know that the stated price is not the "real" price but a much lower amount</i> I think the "real price you are referring to is the production cost, which generally (unless is subsidized) is lower than the sales price.<p><i>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</i><p>What is exactly the "true" price? As far as I know an item is worth whatever someone is willing to pay for it.<p>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.<p>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.

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.<p>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.

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.

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.<p>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.

I guess I really don't understand this part of what you wrote:<p><i>it may hurt businesses over the long term even if it provides some short term gains.</i><p>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?<p>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.

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.<p>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.

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.

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.<p>On the contrary, giving the customer a taste makes them come back for more. As long as your product is actually beneficial.

There's a reason the deals on Groupon last only a day.<p>Your argument applies equally to Gilt, but I don't think people are going to start paying less for Diesel jeans.

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.<p>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.