The myth of the deals industry

To understand the basics of the deals industry, it is important to go back to how and why deals originated in the first place. If we begin from the “rational” player’s point of view, then prices will be set at the equilibrium point where demand equals supply. However, that requires businesses to have perfect information about consumer demand and price elasticity. In reality, such perfect information is non-existent, leading to mispricing of goods.

As economies got more competitive, the problem of mispricing extended to overflooding of businesses. Typically, there is an optimal supply of any good or service that will yield the highest societal utility from pricing and profit maximization perspective.

A third pervasive problem that deals came to solve was the miscalculation of demand and hence, inventory mismanagement. In a perfect world, where information can solve the problem of misprcing, inventory management, and the number of ideal competitors, then there will be no reason for deals. The deals industry will simply vanish.

The wide success of the likes of GroupOn is indicative of a deep rooted problem of over-supply, and inability of businesses to get perfect information. As such, the deals industry is only a primitive attempt to solve the imperfections of the capitalist economy. The advances of information technology, optimization tools, data analytics and innovative crowdsourcing business models are more advanced techniques designed to solve the same problem of imperfect information, and therefore, are a serious threat to the viability of the deals industry.

The simple question to ask is “would Macy’s prefer to split its revenue with the likes of GroupOn or, would it prefer to have a crystal ball, that can help predict with great accuracy how much to produce and how to price to clear all inventory?”

Clearly, that crystal ball has more futuristic movie appeal than immediate implementation, but that time horizon is not far away. Today, predictive polls, using the wisdom of crowds are being experimented. Data analytics has taken a wing of its own. The predictive models still lag behind, but the momentum is driving us in that direction.

So, the question remains…if you had to bet your money in the future, which would you pick, deals or information technology /optimization tools/ crowdsourcing for predictions? It may be a good exercise to revisit the “Wisdom of Crowds” before calling your bet.

But, this is not a solution residing in the faraway future. It is a problem requiring deep soul searching today. Valuations are predictions of the future. GroupOn’s $30 billion valuation is a bet on that future.

THIS IS the cautionary tale of the deals industry.

However, I had opened my earlier blog “GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” stating that

GroupOn’s ability to survive solely lies in its ingenious appeal to the psychology of the consumer and merchant …I will confidently say it has high chances to succeed…

Before I reveal the secrets for GroupOn’s success, read another cautionary tale “GroupOn is like “dating in NYC”…therefore, every merchant’s nighmare!” explaining the conflict between the loyal GroupOn customer and the merchants GroupOn serves.