TechCrunch published a story on Friday about pricing manipulation by FTD in a Groupon deal. Over at Search Engine Land we saw the same tip earlier last week and didn’t write about it because it’s not in the realm of search.
Essentially the direct FTD Valentine’s day offer (right below) was better than the Groupon offer (left) that was supposedly aggressively discounted:
This negative PR immediately follows a backlash over Groupon’s Super Bowl commercials. Initially there was a defensive reaction by the company and then a recognition that they had simply screwed up with the too-clever ads. Not everyone was hip to the particular type of humor expressed in the commercials.
Now check out an anecdotal comment from a merchant posted to the TechCrunch FTD story:
Again: “their sales rep basically told me to double the price of my product for a month to make things work for me giving a 50% off deal. Living Social did the exact same thing, as did another deal site that reached out to me.”
The guy goes on to qualify: “When both Groupon and Living Social called me it was not necessarily a company prescribed thing, it was basically up to the employees who called me to make the deal work (their job = get deals on board). They basically do whatever they can to make the deal appear solid to their managers.”
This is very much like some of the old allegations about Yelp sales reps and review manipulation. These problems don’t yet represent a “crisis” for Groupon but the company has had a tough couple of weeks.
I wrote last October that some merchants were starting to manipulate pricing to prop up margins with daily deals. If this practice (a la FTD) becomes widespread and consumers get wind of it; they’ll start to distrust daily deals.
I was told by Analog Analytics’ CEO Ken Kalb that he sees no evidence of consumer “deal fatigue” in the general market at this point. But for insiders and early adopters it’s definitely there (just like “check-in fatigue”).
Groupon, LivingSocial and others will need to have a policing mechanism that ensures their deals are real and that merchants aren’t routinely manipulating prices (and that their sales teams aren’t counseling this behavior) to protect margins. Otherwise the segment will lose consumer credibility, which would be death.
February 13th, 2011 at 3:14 pm
I’m on the fence with this one. This type of variable pricing is done frequently offline, whether it be for sales or in different types of catalogs. The online reaction to this seems … naive. It would be like outrage on the breakage rates on rebates. At the end of the day the consumer is still getting a price break, just not as much of a one as they may have perceived.
I actually see this as the first evidence of deal fatigue. It’s a clear signal that merchants aren’t willing to take such a huge margin hit. Groupon seemed willing to work with merchants to find a way to make it work. I don’t blame them really, because the alternative is, IMO, an unsupportable ongoing business model.
February 13th, 2011 at 3:18 pm
The Groupon stores concept gives merchants more control over pricing, just not the reach of a true Groupon. I think that Groupon, Living Social and others should work with merchants — perhaps on caps or other terms.
I also recognize that pricing is manipulated in the real world all the time. However there’s a different model with these daily deals. And, as a practical matter, if pricing deception becomes widespread consumers will simply start to ignore them.
February 13th, 2011 at 3:32 pm
[...] This post was mentioned on Twitter by Greg Sterling, Peter Himler, Mike Manning, brian harniman, Peter Diedrich and others. Peter Diedrich said: RT @gsterling: Groupon Woes Mount with FTD Episode http://bit.ly/hoWTRf [...]
February 13th, 2011 at 3:38 pm
Greg,
I think this is a classic problem of sales incentives driving behavior. Salespeople make commission on what they sell (I know, statement of the obvious).
Even the Google Tags rep we spoke to said something to the effect of “Hey, I’m on commission” – this, right before she recommended keyword stuffing in categories, in conflict with best practices and Google’s own guidelines.
I have no doubt it’s happening. And, consumers attenuate a “going out of business sale” at a furniture store that happens monthly for years.
Much like with Yelp (and with all the original dot-com furor 11 years ago), we just have to stop pretending there’s some new model at play and remember: if it looks too good to be true it probably is.
Will
February 13th, 2011 at 4:07 pm
I agree that trust is an issue. Yet, I’m not sure that consumers will ignore the daily deals from Groupon if trust erodes. They’ll simply not rely on them so readily. Instead, they’ll check numerous sites for the best deal – the best coupon.
If anything, Groupon has introduced the idea of coupons to a whole new (youth) generation. I did a completely unscientific poll on FriendFeed more than a year ago asking if people checked for coupon or promo codes prior to purchasing online. Half did not! I found that shocking given how easy it is to find and locate them. Now, the breakage on these codes can lead to frustration (e.g. – code has expired etc.) but the time usually seems warranted.
So there IS a danger as Groupon reaches for retailers instead of just service merchants. The latter doesn’t have an established online couponing model, while the former does. I think the erosion of trust via retailer coupons could damage the position they have among service merchants.
February 13th, 2011 at 4:14 pm
Coupons will continue to be popular regardless of Groupon’s fate and future. However the daily deals model has created something new for merchants: no risk “advertising” or buying customers. That’s something that they like, if they don’t like the margin pressure.
February 13th, 2011 at 4:16 pm
I would add that people will still check and verify.
February 13th, 2011 at 8:05 pm
Are we finally learning how the merchants are able to do a a groupon?
Groupon told us how a groupon works. Is everyone playing by the rules? Groupon explains it this way. Merchant takes the regular selling price and reduces it by 50% and receives 50% of the remaining dollars and Groupon gets the other 50%, which isn’t much. So how is a merchant able to survive doing a groupon when they give away approximately 75%. Inflating the price is the only way that makes sense as to how a merchant can afford to do a groupon. If this is true, then I ask where is the deal for the buyers if the merchants are jacking up the prices. So what’s the attraction in doing a 50% off of an inflated price? Are we just caught up in the frenzy of a group buy and limited time offer before it expires? Is this time for a Caveat Emptor or ” Buyer Beware “? If it is too good to be true, then it usually is. Ask yourself how a merchant can survive doing groupons? Merchants cannot do a groupon and survive only making 25% of the real selling price and stay in business. If they can do a second or third groupon, could their selling price be so inflated to start with they are making ridiculous profits and are not impacted by a groupon loss or they do not do their accounting until the end of the year and are going out of business?
Buyers, when you see that next groupon in your e-mail box, ask yourself one question “Is it really a bargain or just another inflated/discounted price” ?
Merchants ask yourself this question. If you are blogged about in this space as FTD is and being dragged through the mud, will your loyal customers reading this blog post abandon your business. Is the risk of doing a groupon worth it?
Bottom line – ” No Merchant! No Buyer! No Groupon!”.
February 13th, 2011 at 8:19 pm
Consumer “Deal fatigue” won’t be the end of Groupon, merchant misgivings will.
February 13th, 2011 at 8:55 pm
[...] This post was mentioned on Twitter by Will Scott, Mary Ehret. Mary Ehret said: RT @w2scott: Consumer “Deal fatigue” won’t end of Groupon, merchant misgivings will. http://ow.ly/3VB1M – Screenwerk comment from @timcohn [...]
February 13th, 2011 at 10:17 pm
SMB’s that use Groupon can give away 75% of price
and still profit. All they have to do is know about
customer lifetime value. This is the key to using Groupon.
SMB’s do like no-risk-bring-me-customers marketing.
It’s their favourite. Groupon has just pacakaged the offer well
and assumed more of the risk than most other partners
currently do.
Businesses that use Groupon are bound to use a higher
price if they can get away with it and then discount by 50%.
It’s the first thing I thought about when potentially looking at Groupon.
More and more media owners are moving to pay-per-peformance
models. Even major directories are going this way.
Ultimately even if you lose money on your first sale, providing you
have a good marketing sequence and a good product or service you should
be able to turn a one-off into a long term client and get referrals.
If Groupon become a true marketing partner to SMB’s rather than a pile-them-high-sell-them-cheap merchant then they have a long term business model.
I fear this is too much leap for Groupon as it has been for Yell.com and local newspapers who have routinely sell space, rather than leads.
Good luck to the merchants that can get away with higher prices and still sell
well. It means they have more margin to invest. But even if merchants break even or lose a little, Groupon is probably still worth a go if you know what to do with a customer once you’ve got them.
FIND, GET, KEEP AND GROW.
Groupon can do the first two. It’s up to merchants to do the last two.
February 14th, 2011 at 12:41 am
What would hurt groupon is a combination of consumer distrust and merchant disillusionment.
February 14th, 2011 at 2:43 am
Companies offer differential pricing all the time. For example, Starwood has a special “SPG50″ certificate that you can get by redeeming 1,000 Starpoints. This certificate entitles you to 50% off the rack rate (aka “a price that someone would only ever pay if you put them on a rack and tortured them”) in periods of low occupancy. On at least a hundred tries, I think I’ve only found the “discounted” rate to be cheaper once.
As a sophisticated travel consumer, I expect that. I know that travel pricing is full of fake discounts, just like mattress pricing and apparel pricing at places like the Gap.
But average consumers aren’t that aware of it. Otherwise all of these “sales” would be unnecessary.
The big problem in the FTD case was that the lower pricing was presented to anyone who went to the regular site and the higher pricing was shown to people who went to the Groupon site. Thus it didn’t seem like the lower pricing was a “special” — it just looked like the normal pricing and the Groupon pricing looked like a gouge. If the regular Web site pricing required a coupon code or a special path (e.g. clickthrough from another partner) then I don’t believe the uproar would’ve been as strong.
This story does illustrate that the current economics aren’t working. They are skewed too much in favor of the consumer and Groupon. The first dot com boom was selling dollars for 50 cents; the current one is getting others to sell dollars for 50 cents and charging them 25 cents for the privilege.
The economics have to work for all parties in order for this to be sustainable. This can happen in any number of ways: reduced margins to the deal site, less generous deals to consumers, better targeting of prospective deal recipients or some combination of these.
For many local businesses, especially restaurants, the target market area is a 3-5 mile radius. (Which is why restaurants aren’t big YP customers — you end up paying for too much reach.) Restaurants using Groupon are essentially buying too much reach by offering discounted meals. If someone is willing to drive from San Carlos to the Mission for a cheaper meal, that’s probably someone the business owner doesn’t want. Restaurants that would ordinarily attract people willing to make that drive don’t need to advertise. (I’m still waiting for that flour+water Groupon… not holding my breath.)
Better targeting would also help attract the customers that you do want. I’m tired of getting emails for places that are 40-50 miles away. If the hit rate of desirable offers gets too low, I unsubscribe, reducing the quality of the Groupon list.
February 14th, 2011 at 2:44 am
I agree trust erosion is potential issue for Groupon. It opens up opps for other deal providers if the issue persists, which it will because now the media have their teeth into it.
That said, I am not convinced that consumers care where the deal comes from as long as it’s a good deal on a product/service they need or want. For deals, the question is do I trust the merchant, not the deal provider. I’m also not convinced the deal has to provide a 50% discount. Give me a 30% discount on said product/service and I’m still very happy – and a 30% discount leaves the merchant happier too.
February 14th, 2011 at 12:49 pm
Agree that people don’t care about the deal source. But there’s not a lot of awareness of most deal sites beyond a small handful.
February 14th, 2011 at 10:29 pm
I would argue that a Groupon customer is a tough customer to convert into a regular (full price paying) customer and therefore they are worth the cost. They are a segment that is always looking for a deal and aren’t likely to return. Unless your marketing is built on coupons anyway, as a retailer or service provider, I would avoid Groupon and go back to some SEO & SMM basics (not to mention a good value proposition to begin with).
February 23rd, 2011 at 6:04 am
[...] the earlier FTD incident it appears that another local business is trying to play fast and loose with pricing on Groupon. [...]
March 16th, 2011 at 3:01 pm
The comment above that customers check and verify deals is unfortunately not the case with the majority of consumers. Some simply cannot be checked easily as there is no online price to compare against, but in most cases the consumer loves a deal – even if it isnt a real one. Groupon today are advertising a 67% discount at one of our competitors. The true discount is actually 0%. The competitor/groupon has inflated the real price by 200% to achieve the two thirds saving. Trading Standards and our lawyers are getting warmed up…
March 16th, 2011 at 4:23 pm
Yes. I agree that many will not. But my point is that it’s a simple process to check out whether the pricing is genuine or a manipulation.