Oct 242011

Why am I not surprised that Groupon is apparently not so successful any more? Although its beginnings have been astonishing, I believe there’s got to be a point of diminishing returns when there’s too many customers in the game, so the prices will have to adjust and the deals won’t be as attractive. That moment for Groupon may be closer than expected according to the past weekend’s news (October 21, 2011).

Let’s look at a similar example – preferred customer cards in big supermarket chains: first it used to be much more affordable to buy products with the card, but then as the number of customers grew, the prices rose as well. When a critical mass of customers accepts the scheme, the “true”, non-discounted price has to go up so that customers with cards still see it as if they are getting an excellent deal at the “preferred” or “lower” price, so that the product is still making profit. Otherwise the manufacturer or seller would go bankrupt, which is almost never the case.

As a result of a constant fight of a few impatient and demanding customers (I myself walked out and left my full basket behind more than once), mostly everybody gets to use a preferred customer card for a purchase – either their own, or the cashier’s generic one.

So when the “special” customer base spreads like this, the stores need to artificially raise their prices so the apparent “sale” prices still look attractive. But then at some point you (as in my example) go to a Mexican food store at a less visited part of the city and you see the real prices and how much you’re getting ripped off, so you totally stop going to the big names with “discounts” and learn instead which stores have best bargains for different goods.

Groupon scheme will do the same in the long run – a store or service or manufacturer will offer some discounts until they get showered with orders and lose money, sometimes unable to meet the demand. It was great in the beginning when its sales and coupons were in small numbers. But as the number of customers grows, the orders start getting dangerously large and the discounts diminish. Coupons are good in limited numbers. When they grow uncontrollably, they work against themselves.

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