Pricing for Group Effect

By Tony Singh ID 212401746

The prevalence of online discount coupons sites are becoming very popular in a deal hungry online population. Consumers are scouring the web for better deals on restaurants, hotels and vacations, hair and nail care, and a plethora of other goods and services.

Groupon Main Page

Source : Groupon Australia

Groupon is a market leader in this space offering a compelling interaction between businesses and consumers by presenting goods and services at a discount. Sometimes at very substantial discounts from the normal retail price. It is this platform that allows Groupon to be so successful. Launched in 2008 the site is extremely successful website recently passing in a $6Billion buyout from Google.

The concept of coupons is based on the loss leader principle. The idea is essentially this – consumers take advantage of a significantly discounted one off purchase for a good or service with the tail end benefit being that this same consumer will later pay full price for the good or service at the next visit. Further the site regularly offers enticement for higher valued items in the same discounted offering. The coupons are time boxed and are only available for a short period of time.

Loss leaders are a known pricing strategy and is key for allowing your business to gain new customers and increase return visitors. This is precisely what Groupon seeks to promote to its business subscribers

 

How discount sites work?

Groupon and other online coupon sites offer discounts on goods and services based in your local area. This allows the platform to maintain a degree of personalisation to the experience. The offers are local and relevant. The coupons are not actually distributed until a specific critical mass of people have committed to the purchase. No coupons are a issued if there are not enough people expressing interest or laying down commitments to purchase the coupon.

The concept works on a win-win basis. Groupon have developed a platform that allows businesses to present a deal or coupon to new customers, they get a 50% cut of bringing in that new customer and the business win by bringing their product or service to a new customer. Other sites have tried and are operating in this space but Groupon has grabbed significant market share. As the NY Times describes “It has 175 North America cities and 500 overseas, it is the fastest growing web company in history having attained a value of $1.5 Billion in only 18 months”

 

Why would consumers use them?

NowLater

Discounts work on the principle of urgency. Groupon have made online discounts an artform by limiting the discounts availability to a specific period of time. Time boxing this creates an immediacy that is compelling to a number of potential purchasers. The psychology of the purchase is that If they don’t buy the product now at the discounted price, they’re likely to miss out on saving some money. The anticipation of the consumer missing out is the precise reason the power of Groupon works. According to the Pleasure Principle and the Regulatory Focus Theory people seek pleasure and avoid pain. The author of Yoast asserts that it is this anticipation of missing out on a discount is definitely a pain people will want to avoid.

Of course discounts represents prudency when it comes to purchases. Why wouldn’t you want to save money on consumer goods and services? Consumers are always looking for the best deal when parting with their dollars. However there are some negatives when it comes to this form of service offering

 

Are coupons a good thing?

Psychology today asserts that the american consumer is crazy about coupons. The publication details that 40% to 80% of Americans use coupons regularly. On first review its seems that this is what any prudent or efficient shopper should do but on deeper analysis the following is a key issue for consumers and users of coupons like Groupon.

  • Pricing is ignored when using the coupon. Evidence shows that consumers are often excited by the prospect of getting a deal and focusing on the percentage saving without analysing whether it actually is a saving. Cautions should be made with using coupons and Groupon are experts at creating the gloss and glamour of a good deal.

MainGrouponPage

Source: Groupon Australia

  • Coupon purchases are often done often with things that people do not essentially need. An american consumer report identified that 63% of consumers bought things they don’t need because of a coupon.

From a business perspective this may be ideal as a one off purchase for your goods. But to build a sustainable brand and customer loyalty you need to promote goods and services hat resonate value to the consumer.

Coupon Value Concerns

Groupon says that the system works and works well. It claims that 97 percent of companies that offer deals on the site ask to be featured again. But some questions have been raised as to Groupon’s efficacy for businesses. Some businesses complain that Groupon customers are bargain chasers who quickly move on to the next cheap offer. This has mentioned previously does not build a sustainable offering. In fact, a recent study at Rice University found that 80 percent of customers who buy discount deals from sites like Groupon and LivingSocial are first-time customers, and that only 20 percent of them ever return. Even worse for the bottom line, only 36 percent buy goods or services beyond the value of the Groupon

Interestingly, it was found that one in five people who buy a Groupon or similar discount never redeem the voucher. Instead of losing 50 percent on the deal, the business gets paid for not providing any product or service.

 

Chasing a bargain has never been easier but how sustainable the model is for your business remains to be seen.

References

 

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