Tony Keller: How group buying sites have spawned a breed of fickle, bargain-addicted consumers that will never pay full freight again
Late last year, Marlon Pather, owner of a midtown meat shop called The Butchers, embarked on an ambitious plan to sell thousands of online coupons. Like other merchants seized by the daily deal mania of websites such as Groupon, he thought that his deep discounting would bring in new shoppers. It did. He quickly became Canada’s biggest coupon merchant, selling 22,000 coupons, worth millions of dollars, in a few months. Pather thought the new customers would redeem the value of their coupons gradually, but they cashed in all at once. By spring, he realized that his loss leader strategy had turned into a straight loss. Customers were lined up around the block, and the fridge was constantly running out of stock. The coupon clients came for the discount—$400 worth of steaks and burgers for just $100—but every time the cash register rang, Pather lost money. And his established clients, who until then had been willing to pay full price, were having trouble even getting into the store.
The daily deal or group buying business is suddenly the hottest sector on the Internet. Groupon, the industry leader, has been described as history’s fastest-growing company, its annual sales ballooning to an estimated $3 billion in only three years of operation. In the first quarter of 2011, the company sold 28 million coupons. The simplicity of the idea has spawned hundreds of imitators, and they all work on the same model: customers pay up front for vouchers offering deep discounts, at prices usually at least 50 per cent below retail. Coupon revenue is generally split 50-50 between the daily deal company and the merchant—which means that a merchant offering $400 of meat for $100, as Pather did, is actually offering $400 of product for a payment to him of only $50. That’s nearly 88 per cent off retail price.
Toronto-based sites such as Dealfind, TeamBuy, Buytopia, WagJag (owned by Torstar) and WebPiggy are fighting for a piece of the action. There are sites targeting niches: Toronto’s Food Scrooge brings group buying to groceries; GroupDudes offers deals for guys. (I missed their coupon for 55 per cent off hockey equipment sanitizing.) Facebook, Google and Amazon are all entering the field. A survey released this spring by the market research firm Vision Critical found that 49 per cent of Canadians had already visited at least one daily deal site.
Groupon’s name is meant to suggest that savings come from large groups of people banding together to buy in bulk. The industry furthers this myth, describing itself as the “group buying” business. In reality, these sites are in the advertising business. Coupons are a great marketing tool. And some coupons, even those promising very deep discounts, can be immediately profitable—but only for certain kinds of businesses. For companies whose main costs are mostly or entirely fixed—such as salaries and rent—deep discounts can be profitable.
That’s why you see so many salons, gyms and dance studios offering online coupons. The marginal cost of adding one more student to a salsa dancing class is zero. The business’s costs—the rental of a classroom, the hiring of an instructor—are fixed. It costs no more to teach 20 students than it does to teach 10, which is why a dance studio that has already charged full price to the first 10 students may still turn a profit on the next 10, even if it only charges them pennies on the dollar. Airlines have long worked on a similar principle, with passengers paying wildly different prices for seats on the same flight, depending on when they buy them.
But a butcher shop is nothing like a dance studio or a half-empty plane. Pather’s main cost isn’t real estate or labour: it’s meat. Pather must buy every steak he sells. His expenses increase in lockstep with sales. If he sells $400 worth of New York strip loin for $50, he loses money. And the more he sells, the more he loses.
Losing money on some sales isn’t necessarily a problem: the largest retailers in the world have been doing it for decades. The loss leader strategy of targeted, limited discounting makes sense when it brings in customers who end up buying other, more expensive goods or services as well. Remember when the phone company gave you that “free” BlackBerry, but only after you agreed to sign a three-year contract? Or look at your computer printer: why is a complicated piece of electronic equipment cheaper than a cartridge of ink?
Pather took a bath on his coupons: he told me he lost “more than $100,000.” That sounds like a conservative estimate. There’s no Internet magic that turns meat sold at 88 per cent off retail into a profitable sale—something Pather’s coupon buyers seemed to instinctively understand. WebPiggy, Dealfind and Buytopia, the sites Pather used for his sale, can’t reduce the average cost of a beef patty. The Butchers had lineups around the block because couponers knew the deal was too good to be true, and they wanted their 10 pounds of flesh in case the place went broke.
The Butchers was a case of the merchant being taken by the customers, or perhaps by himself, but that’s not usually how it goes. As anyone who’s ever tried to haggle for a car has learned, the seller almost always triumphs over the buyer. Lots of customers out there are getting a deal, but for the merchant to be profitable, the deal getters have to be balanced by other customers who aren’t getting a deal—“price differentiation” is the egghead term. Or else what appears to be a discount really isn’t. In a recent paper on Groupon’s business model, three Harvard economists concluded that “as more consumers use vouchers, voucher users necessarily come to resemble average consumers.” In other words, if most people are buying at the deal price, then the deal price is really just the regular price. Which leads to a philosophical retailing question: if everyone’s buying something “on sale,” is it really on sale?
But we all want to feel like winners. So, to play the game according to the rules demanded by today’s bargain hunters, sellers have learned to mark up so as to allow room to discount down. (Paying the price quoted on a hotel website? You overpaid.) They’ve learned to make buyers work a little bit for their savings, sprinkling coupons and Internet deals and secret savings codes among different audiences—some to attract new customers, some to keep loyal ones, and some for the kind of people who are obsessive enough to spend hours trolling online travel forums, looking for a discount code that will chop $50 off the price of a rental car next winter in Arizona. (Guilty.)
Indeed, if Marlon Pather had come clothes shopping with me, I could have saved him all that money. There’s a menswear store in the Annex that I used to visit once a year. I live just down the block, but the only time I shopped there was during the annual street fair. On that day, the store would haul some of its stock onto the sidewalk, marking dress shirts down by two thirds or more. If there was anything worth buying, I’d buy. And for the next 364 days, I’d stay away. Had a deal converted me into what Pather was looking for: a loyal customer? Nope. On the contrary, the deal trained me to be an uncompromising deal seeker. And the more deals I land, the more I’m persuaded never to pay retail. Or at least to shop somewhere that knows how to make me feel like I didn’t.
 and WebPiggy are fighting for a piece of the action. There are sites targeting niches: Toronto’s Food Scrooge brings group buying to groceries; GroupDudes offers deals for guys. (I missed their coupon for 55 per cent off hockey equipment sanitizing.) Facebook, Google and Amazon are all entering the field. A survey released this spring by the market research firm Vision Critical found that 49 per cent of Canadians had already visited at least one daily deal site.
Groupon’s name is meant to suggest that savings come from large groups of people banding together to buy in bulk. The industry furthers this myth, describing itself as the “group buying” business. In reality, these sites are in the advertising business. Coupons are a great marketing tool. And some coupons, even those promising very deep discounts, can be immediately profitable—but only for certain kinds of businesses. For companies whose main costs are mostly or entirely fixed—such as salaries and rent—deep discounts can be profitable.
That’s why you see so many salons, gyms and dance studios offering online coupons. The marginal cost of adding one more student to a salsa dancing class is zero. The business’s costs—the rental of a classroom, the hiring of an instructor—are fixed. It costs no more to teach 20 students than it does to teach 10, which is why a dance studio that has already charged full price to the first 10 students may still turn a profit on the next 10, even if it only charges them pennies on the dollar. Airlines have long worked on a similar principle, with passengers paying wildly different prices for seats on the same flight, depending on when they buy them.
But a butcher shop is nothing like a dance studio or a half-empty plane. Pather’s main cost isn’t real estate or labour: it’s meat. Pather must buy every steak he sells. His expenses increase in lockstep with sales. If he sells $400 worth of New York strip loin for $50, he loses money. And the more he sells, the more he loses.
Losing money on some sales isn’t necessarily a problem: the largest retailers in the world have been doing it for decades. The loss leader strategy of targeted, limited discounting makes sense when it brings in customers who end up buying other, more expensive goods or services as well. Remember when the phone company gave you that “free” BlackBerry, but only after you agreed to sign a three-year contract? Or look at your computer printer: why is a complicated piece of electronic equipment cheaper than a cartridge of ink?
Pather took a bath on his coupons: he told me he lost “more than $100,000.” That sounds like a conservative estimate. There’s no Internet magic that turns meat sold at 88 per cent off retail into a profitable sale—something Pather’s coupon buyers seemed to instinctively understand. WebPiggy, Dealfind and Buytopia, the sites Pather used for his sale, can’t reduce the average cost of a beef patty. The Butchers had lineups around the block because couponers knew the deal was too good to be true, and they wanted their 10 pounds of flesh in case the place went broke.
The Butchers was a case of the merchant being taken by the customers, or perhaps by himself, but that’s not usually how it goes. As anyone who’s ever tried to haggle for a car has learned, the seller almost always triumphs over the buyer. Lots of customers out there are getting a deal, but for the merchant to be profitable, the deal getters have to be balanced by other customers who aren’t getting a deal—“price differentiation” is the egghead term. Or else what appears to be a discount really isn’t. In a recent paper on Groupon’s business model, three Harvard economists concluded that “as more consumers use vouchers, voucher users necessarily come to resemble average consumers.” In other words, if most people are buying at the deal price, then the deal price is really just the regular price. Which leads to a philosophical retailing question: if everyone’s buying something “on sale,” is it really on sale?
But we all want to feel like winners. So, to play the game according to the rules demanded by today’s bargain hunters, sellers have learned to mark up so as to allow room to discount down. (Paying the price quoted on a hotel website? You overpaid.) They’ve learned to make buyers work a little bit for their savings, sprinkling coupons and Internet deals and secret savings codes among different audiences—some to attract new customers, some to keep loyal ones, and some for the kind of people who are obsessive enough to spend hours trolling online travel forums, looking for a discount code that will chop $50 off the price of a rental car next winter in Arizona. (Guilty.)
Indeed, if Marlon Pather had come clothes shopping with me, I could have saved him all that money. There’s a menswear store in the Annex that I used to visit once a year. I live just down the block, but the only time I shopped there was during the annual street fair. On that day, the store would haul some of its stock onto the sidewalk, marking dress shirts down by two thirds or more. If there was anything worth buying, I’d buy. And for the next 364 days, I’d stay away. Had a deal converted me into what Pather was looking for: a loyal customer? Nope. On the contrary, the deal trained me to be an uncompromising deal seeker. And the more deals I land, the more I’m persuaded never to pay retail. Or at least to shop somewhere that knows how to make me feel like I didn’t.){kind=link}
I wish you had done more research for your article. Marlon has scammed 1000s of people. Customers did not take advantage of him. He is the one that agreed to the deals, he is either a very poor business man or a scammer. I am leaning to the later. Check out the big discussion on him/this deal on Redflagdeals in the groupbuy forums. 100s of people complaining about how they were treated. Stories of Marlon trying to sell “organic” meats that weren’t truly organic. Lying about his suppliers, the list goes on and on.
Agree totally with article…would actually go farther…coupony types are cheap, intransigent, petty and may I say again, CHEAP…its like Winterlicious, only for products…get a life, buy what you can afford and stop being these little yuppy (while being CHEAP) whiners.
Sure, WillDel, its the customers fault for actually having the gall to buy and then redeem the discount coupons for the various businesses that are offering them.
Much like Winterlicious (which I’m so tired of restaurants constantly complaining about as they continue to sign up for it year after year), no one is forcing these businesses to offer these discounts through Groupon, et al.
If they find that the coupon holders are a pain, the answer is simple – you suck it up, get through your offering period (since these coupons always have an expiry date) and make sure you don’t do it again. Seems like a simple solution to me. If you’re not willing to do that, then shut up about it.
never EVER will i buy again from any group site, after being ripped off by The Butcher, or Marlon’s Meat, or whatever he’s calling himself.
Trust.
ZERO.
Horrible article.
Left out everything important.
We at GroupBuyingCanada.com research and track the industry in Canada. Over the past year there has certainly been a fair share of deals that are too popular, sell too much or are from merchants that are not that reliable. Nevertheless, 90% of the deals are from reliable merchants that consumers trust and would go back to.
Tips for consumers:
1. Like any ecommerce site, only buy from deal sites and from merchants that are credible.
2. Do not buy from hugely popular deals. Especially for a smaller one store merchant. The popularity of the deal will overwhelm the merchant and typically provide the consumer with poor service.
3. Do not generalize that all deal sites are bad. Most are very good and most offer return policies and refund policies unheard of in the retail business. If you are not satisfied with your experience, most will offer a refund or credit.
4. Of course, daily deal sites have plenty of coupon chasers, but m,any do not buy from deal sites simply because they are chasing a deal. Many buy something they have not experienced before. A new restaurant, a great adventure, a city escape, travel. Etc Some of these site are great at coming up with interesting things to do and see in and around your city. And since they are at 50% off, you get to experience them at a reasonable price.
All in all, this industry is new, and much like the ecommerce industry in the late 90s, it will take a few more years to ensure that customer service is far better than it is today.
many thanks
Albert
I purchased a coupon for The Butchers, with the intent of trying it and possibly becoming a regular customer (I buy organic meats for my family from small local butcher shops and live very close to The Butchers). The business practices exhibited by The Butchers has ensured that I will (a) NEVER shop there, and (b) never buy a group buy-type coupon again. NEVER AGAIN.
Pather should be charged with fraud and arrested. Absolutely no sympathy for him. I used to shop at the Butchers, and paid full price. Haven’t returned since this all hit the fan. He offers a deal he can’t back up and then blames the customers. He should be in prison.
You people WHINING about getting suckered on the Pather deal REALLY need to calm down. I think the writer of this piece makes a good point when he says that many of you knew damned well it was too good to be true, so you flooded the place to get your “pounds of flesh” before you inevitably drove it out of business.
Do you really think ANY of the coupon sites care if you never ever ever (ever, I say!) buy another coupon? Millions of us DO buy such coupons with regularity and have yet to have a bad experience. If anything, I’ve needed to curtail my buys so I don’t end up with too many coupons and not enough time to use them. I generally stick to restaurant deals as I’ve only lived in the city about four years and wasn’t able to afford new restaurant experiences with regularity until the coupon sites came along.
To be fair, there are FAR TOO MANY coupon site deals that claim to offer you 80% or 90% off this service or that, only to upsell you HARD once you’re through the door (gyms, spas and medical-type treatments are the worst for this whenever their discount is obscenely high). If your Spidey sense doesn’t tingle at some of the steeper discounts offered on all these sites (or the alarming number of deals on “magnetic therapy” bracelets of late), then you deserve to be parted from your money.
One more thing: I’ve yet to have any of the four coupon companies I deal with refuse to issue me a credit or outright refund whenever I requested one.
the question is
if you buy a coupon value $50
and you pay $25 only
what you going to get is only $25 value
and the reason is the business have to pay 50% to groupon
so means $12,50 value
see in the spanish dictionary the translection of ES UN GRUPO
Hey Weston.
That only explains how the deal works between the business and the coupon company, which everyone pretty much KNOWS ALREADY.
I’ve used coupons at MANY restaurants I previously visited at full price, and the quantity and quality (for better or worse) was the same in either case. They don’t (and certainly shouldn’t) discriminate against customers they know are paying with a coupon. In fact, those are the customers they most need to impress, because they may or may not return for a full-price meal based on the quality of product and service they receive while using their groupon, wagjag, etc.
Any service is only worth what the customer is willing to pay. Many restos go under because their prices are too high in relation to their menus. YOU might think a $50 meal is only worth $25 in the first place, and you might be right, but better to test it out for $25 than the full $50. Just as I’ve discovered (and returned to) amazing restaurants thanks to the coupons, I’ve also discovered a few that I’ll never bother visiting a second time.
While I agree that coupons and constant sales only encourage shoppers to wait, it took only basic math skills for The Butcher to figure out his cost/benefit scenario. Really – apart from the literal cost, it could be the zero balance in goodwill that will be his undoing.
There’s a lot of positive buzz about the new family/community focused group-buying company in Toronto, http://www.buck-off.ca – be interesting to see how all these companies get along come springtime.
The dance class example is actually a poor one. Many dance instructors are compensated per student in their class. So bringing in more students usually increases the studio’s labour cost. This article has gaping holes everywhere.
Marlon’s strategy was to delay the refunds as long as he could. He or one of his employees would call me and say the order was being prepared and that I should be able to get within a few days. That line was used to bait me along for 4 months when I finally tired of it and contact my credit card company. The reality is was I was the sucker for believing that deal($400 voucher for 100$) could be ever fulfilled. Never again will be taken in by this sales approach. at the end of day,I would rather eat dog dung than his products.