Groupon Strategy

1. How have companies like Groupon affected the pricing strategy of firms? Historically, companies have issued coupons in order to attract new business or irregular customers that seldom purchase a company’s products and/or services, with the hope that they come back more often. This is consistent with the idea that getting new customers is more expensive that maintaining a customer base.

Companies’ approaches when issuing coupons have usually been one of three: 1) taking a small hit (loss) in order to stimulate subsequent buys (“loss leaders”), 2) incentives and bonuses (free items when another one is purchased), or 3) making a lower profit, but nevertheless a profit, by issuing price discrimination coupons. All in all, these approaches usually constitute a minimal economic encouragement that only super-couponers seem to really take advantage of.

Groupon and its competitors, on the other hand, offer discounts that are usually much more aggressive, usually 50% or more off the retail price (keeping half of the transaction value for itself). Since these social, mass deals reach high numbers of consumers, these daily coupons that make available large discounts have eroded from the consumers’ minds the idea of a fixed retail price. Companies that do use the Groupon approach hope in the mass success of the discount and that a portion of those new customers will become regulars.

But for companies that don’t adopt the Groupon model for issuing discounts, they risk losing or never getting those customers that don’t want to pay the full retail price, specially if those customers never bought any goods or services from them. Nowadays, companies’ pricing strategies that don’t consider the effect of online social coupons on their own margins might lose their appeal if they continue issuing regular, unattractive coupons that average consumers would not consider appealing enough. The consumer is not necessarily dependent on the terms dictated by the vendor anymore. . How have companies like Groupon affected consumers’ perceptions of prices? For consumers other than super-couponers, meaning, those consumers that are not like bargains but don’t spend the time to hunt for the best deal, Groupon and its competitors have been revolutionary: these companies find attractive businesses, negotiate with them the deals, and deliver the coupons in convenient, effortless ways for consumers to find (online, in mobile devices, via e-mail and social media as friends’ recommendations, etc. ).

For these consumers that didn’t or maybe couldn’t find the best deals, the best deals and finding them, making the purchase experience fast and convenient. And even for free, if enough of your friends buy a deal you recommended to them. In this sense, the buying experience has become a more interactive, social experience, where the best deals and shared and echoed online. This is making customers exponentially smarted, maybe not about the true cost of products and discounts, but certainly about what they and their friends are willing to pay for them.

Groupon has also broadened the standards of what consumers are willing to spend money on, especially when it comes to more unusual experiences that were not part of a buyer’s purchasing habits. As long a the price is low enough, Groupon is making it possible for consumers to spend their money on great deals for, likely, unnecessary but gratifying experiences, sharing with others the buying experience and, who know, a hot air balloon ride. 3. What is the downside for firms using Groupon? How can firms mitigate it?

Some businesses have argued that the Groupon – offering deep discounts for daily deals, usually with a maximum number of coupons available – disproportionally benefits consumers more than businesses. These firms complain that discounts purchased on Groupon, for example, are great for attracting large crowds of customers who never materialize on the promise to become regular customers. This type of situations leaves the firm at a loss, having provided goods or service 75% below their retail price and without the returning customers to make up for it.

To mitigate this, firms should work with Groupon and the like to find better ways to reinforce policies, such as making a deal available for first time customers only. Or by offering a discount that is only good if a required number of future purchases is pre-bought. Of course, these approaches would likely scare off a number of customers genuinely interested in assessing the quality of a product and service, not wanting further commitment. Psychologically, it might be hard for consumers to become regular customers and have to pay twice for a product or service they’ve already experienced for half the price.

The best solution is for firms to offer such a high quality or differentiated product, service, and/or customer experience that costumers will want to come to come back. 4. What will be the long run effect of companies like Groupon? Groupon and similar companies will likely become the standard way coupons and discounts are offered to most consumers. Offering discounts through these firms will become an entry requirement for many new businesses, especially those offering more obscure or less common products and services.

Nevertheless, any business in any market could potentially benefit from offering discounts through online social mass coupon firms, such as Groupon. Today, it has become a sound approach for firms that are not attracting enough buyers and traffic with their retail prices. If retailers don’t make the necessary adjustments to their pricing strategies now, they might have to come to Groupon or its competitors as a last resource to increase revenue through an attempt to increase consumer traffic and online buzz (added bonus advertising for using Groupon).

It is unlikely most firms attempting to remain unchanged in regards to its pricing strategy will stay relevant for long; they must acknowledge the pricing threats of Groupon and the like. Customers, either by choice or by constant exposure to aggressive online discounts, are become smarter and savvier shoppers. The retail price is becoming dangerously easy to avoid for firms not willing to recognize new pricing strategies.