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Sep 20Doug Smith

To Groupon or Not to Groupon: The Profitability of Deep Discounts

Sep 20Doug Smith

Groupon’s deal site is wildly popular. I know that I’ve bought my share of deals from Groupon and its cousin Living Social. It’s a great deal for me as a consumer, but is it any good for the businesses that offer discounts through Groupon? Recent research, highlighted in Harvard Business School’s Working Knowledge, sheds some interesting light on the topic.

The paper is highly analytical, with lots of mathematical formulas. Here’s a “Readers Digest-style” summary for the masses:

For consumers, online discount vouchers (like those offered by Groupon.com) have obvious appeal: discounts as large as 90 percent. But for retailers offering the deals through the site, does the publicity compensate for the deep hit to profit margins? HBS Professor Ben Edelman, Business Economics PhD candidate Scott Duke Kominers, and by Sonia Jaffe of the Harvard University Department of Economics conducted research to find out. Key concepts include:

  • For retailers, discount vouchers provide price discrimination, letting merchants reach customers who know about the business, but wouldn’t ordinarily go there without a discount.
  • These vouchers also benefit merchants through advertising, simply by informing consumers of a merchant’s existence via e-mail.
  • For some merchants, the benefits of offering discount vouchers are sharply reduced if individual customers buy multiple vouchers.
  • As a marketing tool, discount vouchers are likely to be more effective for businesses that are relatively unknown and have low marginal costs.

 

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