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.

Multi Version Pricing – At Salons

Salons are not the first place a marketer would look for pricing nuggets. But interestingly enough they practice almost all  pricing techniques in the book, more than we see in other businesses:

  1. Unbundled pricing – separating the price of haircut from shampoo and blow dry. There is also complete unbundling that some salons do not want to see happen.
  2. Price discrimination by age – children and senior pricing
  3. Price discrimination by segments – student discount, men and women at different price
  4. Price discrimination based on cost to serve customers – additional  charges for long hair
  5. Price Promotions – coupons and new customer acquisition

Almost all salons practice  price discrimination, from the low end chain stores to single store boutiques. No salon posts a single price, there are always multiple prices – trying to cover all segments.

Of all these there is one pricing scheme practiced by some high end salons comes close to getting customers to pay their true willingness to pay. Look at this price list from a salon

model thursday 21
apprentice 36
new talent 46
junior 50
senior 55-80
artist 130

They have at least eight price levels available to a customer – all based on the customer’s perceived value of the haircut they would get from the stylist. I claim perceived value because of two reasons:

  1. if the “apprentice” really does such a poor job compared to the “senior” then she would not be working there. A customer who looks at this price list
  2. It is hard for a client or even for am objective observer to tell the difference in the end product, so the price serves as a stand in for quality.

The beauty (no pun) of this multi version salon pricing is that it comes close to first degree price discrimination. This gives the salon an opportunity to nudge the customers to self-select themselves and pay close to their true willingness to pay.

So if salons, even with their  resource limitations and almost non-existent IT systems, can successfully practice multi-version pricing  should you not?

If one price is good, two prices are better!