Saturday, September 10, 2011

How Groupon should move on

Groupon's been a mixed-feelings company lately. On the one hand, it is still one of the late boomers in the industry. On the other hand, there are some issues with the stock market entrance being postponed and accumulating stories about unhappy clients (for Groupon these are the firms/shops providing the offer). 
Although there is a vast literature about the malleability of promotions in the long term, this is even worse for services I believe. Promotions can always invoke feelings of suspicion about a product's actual price. Suppose people doubt the price for your goods, then maybe they are still willing to pay a subjectively overpriced product in the future given high customer satisfaction. If there is some behind-the-scenes production involved, people are willing to pay a higher price. So far so good, for actual goods being offered on Groupon.

One major problem I see - and one I do not encounter in reading about the matter - is the mismatch between the tool (promotions) and the offer when it deals with services. Most offers on Groupon - or similar social or e-promotions - deal with some kind of service rather than a traditional good. For the service-intense goods like fancy restaurant dinners (somewhat in-between goods and service), new haircuts or a facial skin treatment, the actual quality of the good is in the interaction with people. This interaction is a manifest act and I fear that people are quite judgmental about that. Moreover, the promotion actually conveys that one is - sometimes - willing to do the same manifest act at a 50% or 70% discount. The odds increase that the customer will implicitly (or explicitly) derive that the service is overpriced or the quality of the service is overrated, resulting in little repurchasing at the regular price. Add to this that many small to medium-sized businesses (a prime market for these promotion companies) have capacity problems following the promotions. Too little capacity of  course relates to the service quality provided to each customer, thus further instigating the downward evaluation of the service.
In the short term, the above is only a problem of the businesses that offer a Groupon deal. In the longer run, it is Groupon itself that will have to solve this problem.
So how should Groupon move on?
Either they should fold back to promotions for real goods, where it might even be an excellent tool to get rid of excess stock, for instance.
Or, if they do want to keep playing in the service market, they should find other strategies. One could be to offer something else than a price reduction for the service itself. For instance, they could do more offers with goodies (e.g., a free bottle of wine accompanying your dinner; a shampoo; skin care products). As such, customers would still have the idea they payed the regular price for the service. Happy customers should be much more likely then to repurchase after the offer because in their mind the price for the service did not change between the two occasions.

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