How much does a spa treatment cost? A skydiving adventure? A sailing lesson? Price isn't what you or I think it should be -- or even what a merchant wants it to be. To paraphrase of the musings of Randall Tex Cobb as the "Mad Biker of the Apocalypse" in the epic film Raising Arizona, price is what the market will bear. Merchants who set prices too high go out of business. Merchants who set prices too low do the same, after running themselves ragged trying to keep up with customers.

So are group-buying website Groupon and its many competitors setting prices too low for many of their merchant users? This question is of particular importance as the group-buying phenomenon swims local, where merchants are customers' neighbors and first impressions are truly forever.

As I wrote in on DailyFinance last month, America is in a group-buying frenzy. The rapidly growing craze has spawned hundreds of clones and threatens to overwhelm many people's mailboxes with "Daily Deals." Hot startup and market leader Groupon just announced it plans on personalizing deals down to zip codes and has hired a programmer from Netflix (NFLX), the king of personal recommendations. That means Groupon plans to offer a multitude of deals each day targeted at different people, although individual offer recipients will only see one per day.

Between personalization and clones, group buying is spreading so rapidly that it's easy to predict that soon, pretty much everyone will be touched by the trend. What's far harder to predict is what the impact will be on how shoppers perceive fair value in a world saturated by group buying. By fair value, I mean a fair price paid for services rendered: a meal prepared, a night spent in a hotel, etc.

What's an Empty Hotel Room Worth?

Hotel companies already know this issue particularly well. They constantly face the problem that group buying addresses: a need to move expiring inventory that otherwise will be worthless shortly. A hotel room that sits unused is worth nothing. Similarly, a massage table at a San Francisco spa that sits unused for half the day is worth exactly half as much as it would be with patrons getting oiled up nonstop. The easy way to fill those extra rooms or empty tables would be to lower prices.

However, hotels are loath to do that. Why? Because when they cut prices, customers quickly grow accustomed to the new prices, after which raising rates again becomes exceedingly difficult. That's why hotels use all sorts of tricks to disguise the actual price paid for a room, ranging from extra-night-free deals, restaurant credits and offloading chunks of room inventory to travel agencies that package the rooms with flights and rental cars. They don't want customers to be able to easily figure out the "average" price because that would screen out people willing to pay more.

Not surprisingly, almost no one is willing to pay the full rate for hotel rooms. Now translate that same problem to the rest of the small-business world in the age of group buying. In the past, I assumed that if I wanted to go to a good Italian restaurant in San Francisco, I would need to pay the price on the menu. Now I'm awash in a flood of discount offers from pretty good Italian restaurants. If one impresses me with its cuisine, I might return and pay full price. But I also might wait until another deal from that restaurant appears. My perceived value of Italian dinners in San Francisco has, to some degree, been semi-permanently reset.

The Risk of Diluting Your Brand

How many other people have had their perceived values of various goods and services permanently reset by the growth of the group buying trend? I'd imagine it's a fair number. There is, after all, a very fine line between a "discovery engine" and a discount machine. The mom-and-pop merchants who dominate the group-buying scene already have fairly small profit margins, so a broad shift downward in the perceived value of their products could cause many of them serious problems.

I spoke to several merchants who had used group-buying services, and they generally praised such deals but expressed wariness that using them would dilute their brands. Several said they would offer discounts only through the sites once or twice a year. In my own in-box, I've noticed recently that more and more deals have had earlier expiration dates and stricter terms: stipulations such as "first-time user only." Spa offers appear increasingly restricted to lower-value or easier-to-deliver services. And restaurant deals are more and more broken up into multiple vouchers of smaller denominations that can't be used for the same meal.

Bbased on my unscientific observations, which are primarily confined to San Francisco, the merchants have likely recognized their perceived value problem and are hedging their bets. The more restrictive deals increase the likelihood that the purchased coupons will never be redeemed -- a huge windfall -- and the those coupons that are won't be for discounts that are as juicy.

Watered-down offers will inevitably result in watered-down interest, because customers aren't stupid. But small-business owners aren't either, and they're the ones who must find the balancing point between deals good enough to lure customers in, and deals so good they make customers rethink their idea of fair value.

Increase your money and finance knowledge from home

Getting out of debt

Everyone hates debt. Get out of it.

View Course »

Economics 101

Intro to economics. But fun.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:
Robert EDgren

Where to begin an article about daily deals? Well, first of all, which is not mentioned, this phenomenon would not have happened without our bad economic times. Have they helped businesses on a broad spectrum? Could they actually be lifting the country out of this recesssion, keeping jobs, moving services and goods? If you look at the big picture, seems like this is the case. Before these times and Groupon and the thousands of others, it was extremely difficult to present an idea to a business to offer half off.MOst would rely on their 10% or 20% off coupons. We have always had Priceline, Expedia, Travelocity, Overstock, etc. Great bargains I believe. It seems to me one of Groupon's problems is not getting to know their clients, crafting a deal to lesson losses etc. They often throw the meat out to the shopping wolves and a small business can be hurt.
LIke many things, it would make sense to establish relationships with clients on a local level, knowing their needs and expectations, rather than slapping a deal together from a 300 person or so call center in Chicago. Hence all the local daily deal sites are finding a niche. Not to mention their local economy benefits more. This business concept is changing so fast, Groupon for instance used to leave a deal up for 24 hours and so many had to be sold. That seems to be rare now as I see no limits and deals staying up for 3 or 4 days. What puzzles me is the Moscow interest in this concept. Why are they investing millions into Groupon and FacebooK? I think this is a more important thing to ask. This is why I will use any other daily deal besides Groupon.

June 27 2011 at 8:01 PM Report abuse rate up rate down Reply

With the way the recession is, I believe group buying is the way to go! Just like everything else change is needed and this is exactly what we need in todays society. We have always had the concept but took it to a whole new level with going online, and its becoming an epidemic. Personally one of my favorite sites is its a newer site that you can reap benefits from, so it has all the potential to help everyone involved!

March 17 2011 at 1:46 AM Report abuse rate up rate down Reply
1 reply to emartin6018's comment
emartin6018 sorry

March 17 2011 at 1:51 AM Report abuse rate up rate down Reply

Alex Salkever has a point about the group-buying trend. It will really cut-off the profit margins of businesses once they lower the rates of the deals they are offering. However, since group-buying has been a craze to a lot if people, I think it will only cost a bit to businesses and consumers alike. On the other hand, try catching up with a list of deal sites in one place. Visit!

October 20 2010 at 6:32 PM Report abuse rate up rate down Reply

This guy must have vested interest or Warren is footing a bundle on it .
Sounds like a scam to me , offering something to get you in and then sell you more .
Bait and Switch !

August 16 2010 at 8:42 PM Report abuse rate up rate down Reply

Group buying in this format may be new, but group buying has been around for decades in the form of DirectBuy, Costcot, BJs etc.

August 16 2010 at 4:44 PM Report abuse +1 rate up rate down Reply