Is Groupon a tool for price discrimination

NPR’s  Robert Smith claims Groupon’s success comes from simple economics, “Different people are willing to pay different prices for the same product”.

Since some people are not willing to pay $18 for burgers but are willing to pay $9, Groupon makes it possible to bring these customers and sell them the same burger for lower price.

Smith misses the point and even Groupon will strongly disagree with Smith’s claim. His argument is an extension from regular price promotion coupons which are a way to achieve price discrimination.

None of what Smith describes about price discrimination is incorrect it is simply irrelevant to the new world of Group Buying.

The basic question to ask is whether Groupon and the Groupies are Sales Channels or Marketing Channels.

Groupon positions itself as the marketing channel. Their messaging is about finding new customers who come in for 50% off, fall in love and become a regular paying full price. They do not want businesses to look at contribution margin at individual customer level.

Groupon does not want to be seen as a tool for off-loading excess inventory or just another way to reach sell to new customers. That is the job of a sales channel.

A sales channel  can be a tool for practicing price discrimination. You sell your product through different channels to different target segments and can charge different prices.

As a tool for achieving price discrimination,  Groupon will be effective only if

  1. There are no opportunity costs to selling at lower price
  2. There is no possibility of arbitrage – customers buy through one channel at low price and sell in different market at higher price
  3. It is targeted and does not cannibalize current sales – full price customers continue to pay full price and do not take advantage of 50% Groupon promotion
The secret to success of Groupon is not price discrimination and is no secret at all. It is because we lack the appetite to do the math on long term value of giving away 75% of our revenue for short term long lines.

One thought on “Is Groupon a tool for price discrimination

  1. Based on a conversation I had with Bobby, a manager at Groupon, Groupon is now requiring all contractors, cleaners, handymen and some other areas of industry to register first with the BBB and to be accredited by them. It would appear that price is not the only discrimination being doled out by Groupon. All of the areas of industry are being classified as “High Risk” and not to be trusted unles they pay for a membership to the BBB. We all know how simple an accreditation with the BBB is. Pay your fee and you are in.

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