How the country's new daily-deal phenomenon is making merchants slash their prices and consumers open their wallets
Sometime after 9 a.m., on Thursday, April 29, I officially lost my mind. As a rule, I try to be a careful, deliberate spender. As someone who's spent the last five years writing about personal finance, it's an occupational hazard. But there I was, captivated by an email I'd just gotten from daily-deal site Groupon: $65 for a facial and a mani/pedi at a local spa; face value: $205. It didn't matter that the spa wasn't particularly convenient, or that a "diamond peel facial" actually sounds like it might hurt. I wanted that deal.
But why keep such amazing fortune to myself? I had friends, friends who liked spas, and bargains. I forwarded the email and picked up two takers. We were now all in the heady rush of the deal together. And it was fun. As I look back now on our email chain, there are increasing numbers of exclamation points in every email — and we are not particularly exclamatory women. By the end of the day, I had not only bought the deal and pushed it to two friends, but I had tweeted, posted on the site's forums, and checked back to follow the thread. I had watched the number of deal-takers climb (final tally: 2,074).
With that single sweet deal, I had joined the cult of Groupon, a small army of more than 5 million Americans who have signed up for daily promotions. The premise is simple: One deeply discounted deal, every day, for 24 hours only, and only if a minimum number of people commit. Restaurants, spas, pole-dancing classes, Segway tours, wine-tasting, groceries, house cleaning — everything pops up sooner or later. And people love it. "You get up in the morning, and you see what you can get," said Michelle Madhok, who runs SheFinds and MomFinds, a pair of shopping websites. "I've become completely addicted."
With that kind of enthusiasm, it's no surprise sites like these are booming. With a recent infusion of $135 million in venture capital and the acquisition of European site Citydeal, Groupon is the team to beat, but there's also Living Social, ScoopSt, BuyWithMe, HomeRun, and more than 60 others, according to some estimates. The frenzy has given rise to aggregation services like Yipit, which don't offer deals themselves but instead compile the other sites' offers into a single email. In the 18 months since it launched, Groupon has sold more than 5 million deals, and while a spokesperson won't disclose revenue numbers, it seems likely that users have spent at least $200 million* on the site. "It's exciting to see what you can get or where you can go for a pretty minimal cost," said Catherine Merritt, a public relations coordinator in Chicago. "I like getting the deal as much as I like redeeming it. Maybe more."
Psychologically, sites like these hit us right where it counts, marketing experts say. Limiting each deal to a single day, and counting down the hours and minutes left, prompts us to Act Now! Add in the specter of exclusivity, and the sites confer a little glow of specialness on recipients: by signing up, you've done something smart, and you're getting something good. Way to go, you! Lastly, the deals themselves are compelling: they must offer substantial savings — enough, say, to encourage an otherwise careful budgeter like Jennie Vinson to buy laser hair removal treatments. "I've always been curious, but I wasn't about to spend $750," said Vinson, 32, from Portland. "At $99? Why not?"
All of those are effective, and traditional, marketing techniques. What makes the recent phenomenon so potent is, yep, the Internet (Always to blame!) and the broadcasting power of our social networks (Facebook! See: Internet!). It's human nature to want to brag about a deal or pass it along to friends — the web just makes it so darn easy. And the sites themselves rely on and encourage users to sing it loud and proud. Groupon offers credits for customers who get friends to buy the deal; on Living Social, if you get three friends to buy, your deal is free. Suddenly, there's a tangible reward for doing what we'd probably do anyway, and in its pursuit, we become a million mini megaphones for these daily deals.
Related: What kind of spender are you? Take Bundle's spending quiz
MERCHANT MATH: HOW GROUPON CONVINCES BUSINESSES TO CUT 50% OFF THEIR PRICES
Who opens a smoothie shop in New York in November? Jennifer London, a 38-year-old former educator, that's who. And in those first, slow, cold and rainy months, a friend suggested she could boost her customer base by "doing a Groupon." London asked around, and honestly, it sounded like a no-lose proposition: on one single day, the 150,000 or so people on Groupon's New York City mailing list at the time would hear about Xoom. For free. If less than 1 percent of them became regular customers, it would make a real difference to London's bottom line.
To get on the site, London had to make something of an economic deal with the devil. She had to offer an "unbeatable" deal — and whatever it was, Groupon would get half, which is the company's standard deal with merchants. London's smoothies sell for between $5.50 and $7.75, but she eventually offered everything on the menu, from a typical apple-banana-strawberry combo to the super-thick double-acai-guava-mango bowl, and an upgrade (almonds, granola, what-have-you), for $3. From which Groupon took $1.50, plus a few cents to cover the credit-card processing fee. London's take: less than $1.50 per Groupon. "That's below what it costs me to make a smoothie, pay my people, and pay my rent," she said.
But she figured the marketing was worth it. Plus, how many people would really take the deal? How bad (or good) could it really be? Xoom's feature began on Christmas Eve day, which London assumed "was going to suck." Not quite. The deal "tipped" — reached its minimum, which was 50 — within 45 minutes. By the time it was over, more than 400 people had bought more than 1,300 of her Groupons. Over the following six months, she was going to have to make roughly $9,100 worth of smoothies for which she received about $1,800. "I was dumbfounded," she said. "And a little scared."
The economics of Groupon have garnered criticism from other business owners. "Restaurants are losing money by offering these deals while possibly taking business from other restaurants that don't," wrote Lenny Russo, a St. Paul chef, in a post on the Minneapolis Star-Tribune's website. What's worse, he suggested, is that the easy access to deals erodes customer loyalty: with another restaurant offering 50 percent off just around the corner, why would a customer return and pay full price?
Groupon says 90 percent of merchants notice Groupon customers among their new regulars within a month. But maybe not as many as merchants would like. "I've started using them for all my grooming needs," said Madhok. "I get my hair done only at places where I have a Groupon now." And Angie Arnold, a nurse in Denver, Colo., said she and her husband are on a tight budget, so they may not eat out unless they have a deal. Fortunately, they often do.
THE GROUPON HANGOVER: CAN THIS BE GOOD FOR US?
At the top of Groupon's site, the company keeps a running total of "money saved," more than $205 million at last count. But after the thrill of my first Groupon faded, I started to wonder whether consumers were saving money at all. In my case, I had in fact spent $65 I had not intended to spend, and convinced two friends to do the same. But absent that Groupon in my inbox (for which I eagerly signed up, it's true), none of us would have spent that $65 at all. "We focus on the savings to make ourselves feel good," said Keith Niedermeier, a lecturer in Marketing at the University of Pennsylvania. "But you're probably buying things you otherwise wouldn't have bought."
That's not always, or necessarily, bad. When deals get customers to try new things, that's positive, says Rutgers-Camden marketing professor Robert Schindler. We can all use a little nudge to break our routines. In fact, it's one of Groupon's core principles. "Our customers are looking to explore where they live," said a company spokesperson. "It enables them to do more things with their friends at a price they can afford."
When it works that way, it's great. But many Groupons go unredeemed. The company doesn't say how many; a competitor estimates its own "breakage" rate at around 25 to 30 percent, which means one out of every three or four deals may expire unused. London, the smoothie shop owner, said she's redeemed about 400 of the 1,300 Groupons sold, and the deal expires in six weeks. She's bracing, and hoping, for an onslaught of voucher-waving smoothie drinkers, but if they don't show, she'll come out ahead. And in Chicago, Merritt said she's seen more of her Groupons expire than she cares to admit. There was the production of the Nutcracker on horseback and the wine tasting, and now time is running out for that bacon-and-bourbon event. "I'm more interested in taking advantage of the deal than I am in cashing it in," she said. "I need to start using them and stop buying them."
When people do cash them in, their spending doesn't stop with what they've already paid for the voucher. Groupons don't include tax or tip; at restaurants, they sometimes exclude alcohol. Madhok said she's found some of the deals are structured to make it impossible to spend exactly the face value — you either go over, or you go under. Either way, it's good for the merchant. And then there's the simple desire to take full advantage of the deal. "We usually go over, because we want to make sure to spend the full amount," said Arnold. As a result, customers spend 60 percent more than the value of their Groupon on average, according to the company's web site.
Now that I've been getting a daily deal email for a few weeks, they've started to lose their novelty. Shortly after I bought my first Groupon, another, similar deal popped up — same product, different spa. Still a great discount, but this time, easier to pass. These days, I'm likely to glance at the headline and click "delete." The prices remain amazing. But I've learned there's no rush. After all, tomorrow is another deal.
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