Rafi Mohammed

In Search of the Ideal Groupon Discount

Posted on September 20th, 2012 (0 Comments)

Reprinted from the Harvard Business Review website.

When the deal sites Groupon and Living Social launched a few years ago, I was astonished by the 50% discounts I found promoted for some of my favorite restaurants, stores, and services. While I bought some of these deals, I regret not buying more.

Lately, however, I've noticed that many of the products and services being offered on deal sites aren't as attractive to me: I keep seeing the same offers for yoga classes, massages, 30 day gym memberships, and unfamiliar restaurants. Don't get me wrong: these may be good deals for some people, they're just not the spectacular deals I saw when the sites first launched. As a result, I'm less vigilant about reading the daily missives I receive from deal sites, and I'm purchasing fewer of their offers.

It's not just me who is souring on deal sites — others are too. Once anointed the "fastest growing company ever," Groupon's Wall Street sizzle has faded. In less than a year of being a public company, Groupon's stock price is down over 80% from its high.

So what happened? Some analysts cite "customer fatigue" — they claim consumers are tiring of 50% off deals. I disagree — saving big money rarely gets old. Instead, I believe the demise of deal sites is due to seller fatigue. Here's why. Many sellers believe in "try it, you'll like it" discounts: lower prices to draw in new customers who will return to pay regular prices. It's this carrot of attracting future full paying customers that deal sites dangle to businesses. The problem, sellers are finding, is that customers using 50% off coupons aren't keeping their end of the hoped-for bargain.

Sure, I believe in "try it, you'll like it" discounts. Even if a product provides a demonstrably better value compared to its rivals, customers can be sedentary. A time sensitive (good until a set date) discount — which to consumers feels like cash in the pocket — can be the Pavlovian stimulus that inspires change and product trial. So if this is true, why not offer a big discount? More customers will trial the product which will lead to more full price conversions, right? Not necessarily.

Offering too high of a "try it" discount — say, 50% — can backfire on sellers. Sure, 50% is eye catching, but it also has severe side effects. First, a high discount can appear desperate — this can cause customers to question the long run value of the advertised product or service. Next, by offering a 50% discount, it's more challenging to convince customers to return to pay full price. If you end up liking a product that you purchased for 50% off, wouldn't it be psychologically challenging to pay double (full price) the next time you buy it? Finally, and most importantly, 50% off discounts attract the wrong customers, who I call uber-deal hunters. These deal-maximizers come simply for the big discount with little intention of becoming full price patrons.

The bottom line: too high of a "try it, you'll like it" discount attracts the wrong customers as well as inhibits future full price purchases from potential repeat customers. This is a lose-lose proposition!

So what's the right "try it, you'll like it" discount for your product or service? I've found that 15 - 20% is appropriate. This more moderate discount provides the subtle push necessary to lead interested customers to trial, isn't drastic enough to build psychological barriers that inhibit future full price purchases, doesn't appear desperate, and is less likely to attract uber-deal hunters.

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