The Golden Football and the Economics of Groupon(evanmiller.org)
evanmiller.org
The Golden Football and the Economics of Groupon
http://www.evanmiller.org/golden-football.html
11 comments
That looks like some pretty dubious use of a microeconomic framework which would be better explained using the standard idea of marketing leads to an increase in demand, conventionally represented by an outward shift in the demand curve.
Formally, the demand curve represents the (individual or collective) budget constraint - the maximum people are willing and able to purchase at any given price. Telling an individual/group that to get a particular "special price" they need to [collectively] spend more than the total amount they're willing to spend doesn't work; for [some of] the consumer[s] the reduced rate is still too high to induce them to buy the full minimum quota.
Unless, as in the case of Groupon, the group considering making the purchase expands beyond the existing market for those products. It's straightforward marketing, given a bit of a viral push as the consumer has an incentive to raise awareness of the deal in order to guarantee getting it. More people interested in a product means a greater level of demand at any price point; there's nothing magic about that.
Formally, the demand curve represents the (individual or collective) budget constraint - the maximum people are willing and able to purchase at any given price. Telling an individual/group that to get a particular "special price" they need to [collectively] spend more than the total amount they're willing to spend doesn't work; for [some of] the consumer[s] the reduced rate is still too high to induce them to buy the full minimum quota.
Unless, as in the case of Groupon, the group considering making the purchase expands beyond the existing market for those products. It's straightforward marketing, given a bit of a viral push as the consumer has an incentive to raise awareness of the deal in order to guarantee getting it. More people interested in a product means a greater level of demand at any price point; there's nothing magic about that.
Interesting analysis, but I disagree on three points:
1. This analysis implies that a business would agree to work with Groupon if their sole goal were to maximize today's profits. That's unrealistic.
2. Many Groupons are service oriented. This analysis seems more suited to the production and sale of a physical good. Service oriented businesses have constraints as to how many customers they can serve at a given time (i.e. they generally don't scale, and if they do the quality degrades).
3. On a given transaction, there won't be increased profits for the merchant. Despite the increase in demand, Groupon is taking a 50% cut and I don't think that the demand increase can compensate for the commissions exacted by Groupon.
Those are my "dummies" points. I don't have the econ. background to talk specifically about the supply/demand graphs :(
1. This analysis implies that a business would agree to work with Groupon if their sole goal were to maximize today's profits. That's unrealistic.
2. Many Groupons are service oriented. This analysis seems more suited to the production and sale of a physical good. Service oriented businesses have constraints as to how many customers they can serve at a given time (i.e. they generally don't scale, and if they do the quality degrades).
3. On a given transaction, there won't be increased profits for the merchant. Despite the increase in demand, Groupon is taking a 50% cut and I don't think that the demand increase can compensate for the commissions exacted by Groupon.
Those are my "dummies" points. I don't have the econ. background to talk specifically about the supply/demand graphs :(
I also wonder how many Groupons are never redeemed. My wife buys them fairly often and I'm sure we will lose some in the shuffle and never get around to using them.
According to Wikipedia[1], about 10% of all gift cards are never redeemed. I am convinced that this factors into the Groupon suppliers calculations too.
[1] http://en.wikipedia.org/wiki/Giftcard#Redemption_rate
[1] http://en.wikipedia.org/wiki/Giftcard#Redemption_rate
I wonder if part of the reason for groupon's success is that businesses need to drop their prices because of the recession. Instead of directly dropping prices though, Groupon allows businesses to keep their headline prices as they were, but run these deals. The business owner feels better and more secure - it isn't a price reduction, it's a marketing exercise. But I wonder what the rates of repeat deals are? Any research on that?
I was under the impression that this was a good deal for businesses because they'd just offer the product less their normal costs for advertising/marketing, since groupon did that for them.
They spend less getting the product out (and get an almost guaranteed big order!), it costs less for the consumer, groupon takes a small cut, everyone wins (in theory).
They spend less getting the product out (and get an almost guaranteed big order!), it costs less for the consumer, groupon takes a small cut, everyone wins (in theory).
GroupOn isn't taking a small cut, they're taking 50% of each deal.
Your theory may be correct if they were only offering the discount, but in addition to the 30% a business has to offer, they then have to pay 50% of the deal to GroupOn. So, GroupOn allows them to eliminate ad costs via the discount, but then tacks their fee on top of it, which crushes any hope of margins for the business.
Your theory may be correct if they were only offering the discount, but in addition to the 30% a business has to offer, they then have to pay 50% of the deal to GroupOn. So, GroupOn allows them to eliminate ad costs via the discount, but then tacks their fee on top of it, which crushes any hope of margins for the business.
Which is why ultimately group-on will be squeezed. There are group-on clones springing up like crazy, primarily focused on increasingly small niches. Hell I just heard about a mommy-focused version that launched only two months ago and is doing really well. They're also taking a much smaller cut. It's really hard for group-on to defend it's turf, as you only need penetration in one city to supplant them in that city (or at least compete really effectively).
Ultimately those cuts are going to be under constant assault. It's really a race to the bottom, but it's going to be a money train until they get there.
Ultimately those cuts are going to be under constant assault. It's really a race to the bottom, but it's going to be a money train until they get there.
Our local newspaper started its own Groupon clone. It could be a great side business for all those struggling newspapers. (Or a great startup business for someone to provide turnkey Groupon clones for all these struggling newspapers.)
What's with the intentional misspellings of Groupon?
GroupOn?
group-on?
You reek of bias when you take little jabs at a company by misspelling their name. It's immature and distracts from your more substantive points.
I had to stop reading Mark Cuban's blog when he kept writing about MicroSoft. I'd like to think that HN is more mature than this...
GroupOn?
group-on?
You reek of bias when you take little jabs at a company by misspelling their name. It's immature and distracts from your more substantive points.
I had to stop reading Mark Cuban's blog when he kept writing about MicroSoft. I'd like to think that HN is more mature than this...
The analysis makes sense on a micro level. To any one consumer, it is possible to prefer one bundle of goods (groupon quantity at groupon price) to another bundle of goods (standard quantity at standard price) even though the first bundle lies outside of the individual's demand curve.
However, relative to the quantity desired by any one consumer, the number of units required to activate the groupon deal is quite high. The pressure any one customer feels to buy more to ensure that the deal is activated would be negligible. I would expect that the number of units sold at the groupon price to coincide with the market demand curve.
However, relative to the quantity desired by any one consumer, the number of units required to activate the groupon deal is quite high. The pressure any one customer feels to buy more to ensure that the deal is activated would be negligible. I would expect that the number of units sold at the groupon price to coincide with the market demand curve.
Seems like basic price discrimination to me, with lower customer acquisition costs, or am I missing something?
None of this carries over for non-monopolistic markets. Are monopolies the only place Groupon makes sense?
Depends on how you define monopoly. The analysis is intended to cover any business that faces a downward sloping demand curve. That is, any one who is not a price-taker. A monopoly certainly does.
> The analysis is intended to cover any business that faces a downward sloping demand curve. That is, any one who is not a price-taker.
Those are two different things. The vast majority of demand curves are downward sloping. (The exception being products which show strong network effects.) The key thing about a monopoly is that it is a price-setter, not a price-taker.
Those are two different things. The vast majority of demand curves are downward sloping. (The exception being products which show strong network effects.) The key thing about a monopoly is that it is a price-setter, not a price-taker.
I'll be more specific. In microeconomics (aka price theory), a monopolist is the sole supplier of a good or service at a time/place/condition. The monopolist faces a downward sloping supply curve. In a competitive equilibrium the supply/demand picture we all know is meant to cover an entire industry, while each seller acts as a price taker (same as a horizontal demand curve).
In reality, as you point out, each firm has at least some pricing power, for various reasons, and so from a theoretical perspective they are a monopolist in some good or service defined in the right way. However, In common and legal usage they are not a monopolist.
In reality, as you point out, each firm has at least some pricing power, for various reasons, and so from a theoretical perspective they are a monopolist in some good or service defined in the right way. However, In common and legal usage they are not a monopolist.
"Gory" detail, I like it.
Like the Bucaneers did with their debut season, no one scores with a golden football.
I like the framing of the problem. For SMBs, their path to happiness is determined as either an economics or a marketing problem. And frankly, most business owners just aren't that savvy and they don't know what they want but desperation, and no layers of bureaucracy, lets them try crazy things.
Your product or service is valued accordingly, if it's not garnering as much demand then change the pricing. That's economics.
If you want more people to buy your products at your price then you spend more money research capture that top happiness triangle. That's a marketing problem.
Companies will pitch to SMBs and conflate the two problems. Their ad copy and sales team will tell you all the tantalizing promises of success in the far off mountains, if only you are hardened and wise enough to climb it.
MacHeist came along and tried to solve the economics problem for developers. People clamored that it's good to sell $500 software packages for $49 but don't consider the additional 2,000 low-end customers--customers that wouldn't try the software anyways--indie studios have to support. Not all customers are the same.
Foursquare came along and is trying to solve the marketing problem for SMBs but where's the value proposition? What do you advertise to people that have already checked in to somewhere?
Groupon is the Digg of foot traffic.
I like the framing of the problem. For SMBs, their path to happiness is determined as either an economics or a marketing problem. And frankly, most business owners just aren't that savvy and they don't know what they want but desperation, and no layers of bureaucracy, lets them try crazy things.
Your product or service is valued accordingly, if it's not garnering as much demand then change the pricing. That's economics.
If you want more people to buy your products at your price then you spend more money research capture that top happiness triangle. That's a marketing problem.
Companies will pitch to SMBs and conflate the two problems. Their ad copy and sales team will tell you all the tantalizing promises of success in the far off mountains, if only you are hardened and wise enough to climb it.
MacHeist came along and tried to solve the economics problem for developers. People clamored that it's good to sell $500 software packages for $49 but don't consider the additional 2,000 low-end customers--customers that wouldn't try the software anyways--indie studios have to support. Not all customers are the same.
Foursquare came along and is trying to solve the marketing problem for SMBs but where's the value proposition? What do you advertise to people that have already checked in to somewhere?
Groupon is the Digg of foot traffic.
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1) Provides immediate or near-immediate cash flow to businesses in a bad economy who do not necessarily have great options for raising capital quickly. If you sell 3,000 groupons for an hour-long massage, you're about to get a check for close to $100,000 sometime within the next two weeks. Your employees have to do some work later, whatever, that is $100,000 that can pay the rent and keep the lights on today.
2) Breakage. It will depend on the particular offer, but some portion of Groupons will be sold but never redeemed. Free money for Groupon and the business, what isn't to like?
3) Customer acquisition: many of the companies use the Groupon as a loss-leader to get customers in the store for either upsells ("dinner is deeply discounted, wine is available at the standard prices") or establishing a recurring relationship. Seen in this light, it is just another marketing channel, except one which causes positive cash flow right after you sign on the dotted line as opposed to negative cash flow.
4) Some businesses which offer groupon have unit economics where a marginal customer is essentially pure profit, and anything they can do to get a marginal customer is economically justifiable as long as it doesn't cause spillover effects to the main business. A lot of the service industry is like this: as long as you operate below 100% capacity, the cost of servicing one additional customer is too low to measure. (Beauty salons which pay salaries pay whether the manicurist has someone's hands in hand or not.) As long as you don't cannibalize your existing customer base, it is worth getting a marginal manicure customer at nearly any price you can negotiate.