Last week, the HBR blog turned its attention to the recent infestation of daily deal sites that are causing great harm to businesses.
After much study and multi-regression analysis, they’ve decided that sites like Groupon and LevelUp, are really offering … price promotions.
I was kidding about the multi-regression part. But HBR blogger Utpal M. Dholakia, Distinguished Associate Professor of Management at Rice University, warns that “price promotions are fraught with danger and are suitable only for very specific purposes.”
They don’t lead to increased sales, and they condition consumers, the poor saps, to expect lower prices. So merchants should be extremely cautious.
Of course, Professor Dholakia now has the burden of explaining Groupon’s estimated IPO valuation of $25 billion.
Maybe another HBR blogger has already looked into that? I suppose I’ll now have to assign our research staff this perplexing business conundrum.
Related articles
- Beware of Innovations from Daily-Deal Sites (blogs.hbr.org)
The “exposure” promised by Groupon and its raft of imitators comes at a greater cost to some businesses than others. If I operate a whale watching boat, it costs me as much to send it out whether there are 10 passengers or 50. The additional business generated by Groupon is almost certainly worthwhile. Ditto for my roller rink.
If I operate a day spa, and I pay my employees per appointment (as most do) the additional business generated by Groupon carries heavy costs. The same holds true for restaurants with high food costs and high staff-to-guest ratios.
Still, if I can retain even a quarter of these customers, it may be worth my while. But there’s a big problem here. Discounting has been proven time and again to create, not loyalty, but the expectation of more discounts. If a prospect can’t afford my normal price point, and he or she visits my business as a “bargain tourist” on a 50% or 60% off coupon, all I have to show for my trouble is churn. The Groupon representatives I’ve spoken with have told me that if I can’t hang on to these low-value targets, it’s *my* problem. They accept no responsibility for creating this Frankenconsumer who flits from deal to deal, knowing there’s another bargain ahead. Consumer promiscuity was already rampant before the coupon pox descended, feasting on recession-weakened businesses and companies who were worried they were missing out on This Social Marketing Thing.
Groupon won’t let me select a “blackout period,” like a weekend, during which I don’t redeem their coupons, which means that discount tourists would displace my normally profitable customers. For businesses with high direct costs, Groupon is just sound and fury.
Peggy, thanks for the comments. These are the exact points made in the HBR article based on a decades of research on price promotions. It sounds like what you’re saying is that businesses with, pardon my biz speak, with high-marginal costs– especially in the service area–won’t find it very profitable in working with Groupon. I didn’t know that you can’t select a blackout period.
Groupon is not a business savior, but still I’m puzzled/impressed by this start-up’s amazing growth curve.
–The Editor