A recent research article looks at "deal-a-day" discount schemes such as Groupon from the retailer’s point of view. For consumers, online discount vouchers (like those offered by Groupon) offer discounts as large as 90%. But for retailers offering the deals through the site, does the publicity compensate for the deep hit to profit margins?
Harvard Business School professors looked closely at this issue, in order to help small businesses decide whether it makes sense to offer discount vouchers. The research was conducted by the Harvard University Department of Economics. Key concepts include:
For retailers, discount vouchers provide price discrimination, letting merchants reach customers who know about the business, but wouldn’t ordinarily go there without a discount.
These vouchers also benefit merchants through advertising, simply by informing consumers of a merchant’s existence via e-mail.
For some merchants, the benefits of offering discount vouchers are sharply reduced if individual customers buy multiple vouchers.
As a marketing tool, discount vouchers are likely to be more effective for businesses that are relatively unknown and have low marginal costs.
For vouchers to provide successful price discrimination, the valuations of consumers who have access to vouchers must systematically differ from-and be lower than-those of consumers who do not have access to vouchers. Offering vouchers is more profitable for merchants that are patient or relatively unknown and for merchants with low marginal costs. Extensions to our model accommodate the possibilities of multiple voucher purchases and merchant price re-optimization.
[Source: Harvard Business School]