Why will GroupOn succeed?

GroupOn’s ability to survive lies solely in its ingenious appeal to the psychology of the consumer and merchant – its valuation is outrageously irrational; its business model equally flawed from “rational” economic players perspective, yet I will confidently say it has high chances to succeed, as long as the psychological game persists and remains unchallenged. In a series of bogs, I debunked the valuation of GroupOn and the deal industry in general; however, why do I still believe they will succeed?

The underlying success of GroupOn is pinned in its appeal to the psychology of the consumer and merchant. GroupOn is the first deals based business model that went viral, even though its business model has been around for decades. Since the advent of ecommerce, retailmenot.com, coupons.com among others, preceded GroupOn inviting far larger user base, but far too small valuations. Then, what is the secret sauce of GroupOn? 

The ingenious strategy of “prepaying” for deals & “framing” of savings is where GroupOn innovated. The prepaid nature of GroupOn creates commitment and anticipation which have viral elements.  

• Commitment – Unlike a 10% coupon which you can let expire, when prepaying for a saving, you commit to make the transaction. While a 10% savings offer may be lost in your memory, prepaying keeps it fresh in the mind …you'd better remember that you have already paid for a service that you have not yet consumed… so it’s on top of your mind to buzz about it at parties, among friends…
• Anticipation - Most consumer research shows that the prolonged period between commitment and delivery of experience creates additional excitement. Moreover, anticipation keeps the excitement of the experience fresh, exacerbating its viral component. Remember that anticipated vacation you were telling your friends months in advance?
• Framing – Even when the deal is ordinary, GroupOn can make it sound exciting by framing it in a way that resonates with the customer better. How would you like to receive a $20 for $10 GroupOn for Old Navy instead of 20% off $50? Cialdini spends volumes talking about the psychological pitfalls framing leads us to, but when manipulated smartly by a marketing company, it can attract consumer’s wallet share.
• Addiction - Studies show the happiness factor associated with an experience decreases significantly at the time of payment…hence; we tend to enjoy prepaid vacations more. GroupOn allows you to partially prepay for your experience, thus mitigating the displeasure of payment associated with a service you bought…making you “enjoy” your GroupOn dining experience more than otherwise, and in turn, causing you to come back for more GroupOns.

  

Well, merchants also like the immediate cash flow infusion, giving them immediate gratification over other long-term marketing investments. In addition, it is a great tool to solve for overcapacity and slow moving inventory. But, is the cost justifiable to a small business? Rice university research states over 32% of merchants find GroupOn deal to be a financial disaster.

However, as long as demand for GroupOn remains strong, merchants will learn the price elasticity of the GroupOn psychology and pass on the cost to the consumer in terms of higher list prices or smarter framing of deals. After all, how do you determine the fair price of a hot air balloon ride? Your willingness to pay for the service is the GroupOn adjusted price - but, what makes you confident that the GroupOn adjusted price would not have been the true price had GroupOn never existed?

Although some myths dominate the GroupOn controversy about its lack of targeting …these are easily solvable. With time, GroupOn will possess enough consumer data to allow it to data mine and target offers to consumer preferences. As for GroupOn fatigue, well, that is no different than any form of direct marketing…

Despite all the controversy, GroupOn has the potential to succeed as its innovation appeals to the consumer psychology and merchants will continue to supply it, as long as consumers are willing to buy.