December 5, 2012

MEGAN MCARDLE: Trouble In Coupon Land: Groupon and Living Social hit the skids. Why did we ever think this was going to work?

Coupons basically serve two functions for businesses–advertising, and price discrimination. Advertising means it brings in new customers by making them aware of your service, or giving them an incentive to try it. Price discrimination, on the other hand, is what food processors do with grocery store coupons: it lets them sell their products to customers who are very price sensitive, without lowering the price paid by people who are too busy or embarassed to clip coupons.

As far as I can tell, small businesses viewed Groupons largely as the former: you give away your product near cost, and gain new customers from Groupon’s huge mailing list. Anecdotally, Groupon’s salespeople in fact encouraged businesses to give their product away at a loss in order to attract new consumers. By lowering the cost of trying your restaurant or salon, the theory ran, you could win new business that you wouldn’t otherwise have gotten.

The problem is that for consumers, it seems mostly to have been about price discrimination; people used Groupons to buy something that they wouldn’t buy at full price.

Oops.