Thursday, February 3, 2011

On the wisdom of Groupon

For those who are just coming back from their sabbatical in the middle of the Amazon forest, Groupon is an obnoxious coupon provider that recruits members by validating coupons only when a predefined number of users promise to use them. Also, users prepay and obtain vouchers for the purchased good. The scheme seems remarkably popular among consumers, and Groupon recently turned down a US$6 billion buyout offer from Google. While it is successful among buyers, what about sellers? There is at least anecdotal evidence that some retailers regret participating in the scheme, for example when they get swamped by vouchers.

Benjamin Edelman, Sonia Jaffe and Scott Duke Kominers analyze why businesses would want to participate. First, as for any coupon, there needs to be a reason to discriminate between customers, that is, those that consistently looks for good deals from those who do not bother. Second, it is a good way to get a new business known, and thus accept temporary losses on those deals (if you are patient enough). Third, as those coupons are primarily increasing sales, it is important that the marginal cost of the product be rather low. You do not want to be in Groupon to sell personalized cakes. And I would add that you need to either cap the number of available vouchers or be ready to increase capacity in a moment's notice. You cannot reject customers with a voucher, while you could those with only a coupon.

5 comments:

Tom said...

I'm curious, why do you describe it as obnoxious?

Anonymous said...

Agreed with Tom. I find Groupon to be witty and quite entertaining in addition to the fact that I find interesting things/places to try out. What constitutes "obnoxious"?

I think you might be treading the waters of douchy...

Economic Logician said...

Sad that the only comments that this post attracts are about my remark that Groupon is obnoxious. Why is it so? Because of the barrage of ads, of spam and especially the current members trying to recruit some new ones for some bonus coupon.

Tom said...

Perhaps it is sad - ok, I readily agree with many of the concepts here, and yet why are so many participants in Groupon beauty therapists/hairdressers, etc, who sell hour long therapies (often for not that great of a deal, but occasionally for a bargain) which are a high marginal cost? Or is this a mistake on their part and they're the ones who regret participating?

Perez said...

Interesting post! Groupon will either grow like crazy or drop down a few slots when the big dogs start to play. Groupon’s current $25 billion pricetag is flawed for a number of reasons according to Groupon Priced at $25 Billion!!