4:49pm

Fri April 8, 2011
Planet Money

Groupon's Secret: Everybody Has Their Price

Originally published on Fri April 8, 2011 9:59 pm

How much would you pay for a burger with lettuce, tomato, pickles, onion rings, cheddar and bacon?

At Corner Burger in Brooklyn, Hilda Hampar charges $9.25. At that price, tables in her restaurant often sit empty.

So she made a deal with Groupon. It sent out an offer to its thousands of subscribers: $18 dollars' worth of Corner Burger food for nine bucks.

"The next day [after] the coupon came out, this place was full," she says. "People were waiting outside."

Good news, except for one daunting piece of math.

Groupon charges a 50 percent commission. That leaves only $4.50 for Hampar to pay for the food and the overhead. For Corner Burger to make money, it had to squeeze something more out of the coupon customer.

"If they come and spend exactly $18, then I don't make any money," she says. "But If they come in [as a] table of four and spend $50, $60, $70, I do make a profit."

And, even better, the Groupon might persuade some cheapskates to give Corner Burger a chance.

Economists call this price discrimination: The ability to sell the same product at different prices, depending on how much customers are willing to pay.

This was always the principle of haggling — which Monty Python got exactly right in Life of Brian. You remember the scene:

HARRY THE HAGGLER: Ten?! Are you trying to insult me?! Me, with a poor dying grandmother?! Ten?!

BRIAN: All right. I'll give you eleven.

HARRY THE HAGGLER: Now you're gettin' it. Eleven?! Did I hear you right?! Eleven?! This cost me twelve. You want to ruin me?!

Haggling had perfect price discrimination. You could size up the rich folk and jack up the price. Or lower the price for the poor bloke walking away. Each time, you maximized your profit.

In the 1800s, though, with giant department stores opening, it became more efficient to post a single price. The volume of customers and sales was high, and the people making the sales weren't store owners but low-paid employees.

But merchants still wanted that haggle; they still wanted wanted to sell to the cheapskates.

So they invented coupons.

"If somebody is willing to scan the newspapers, clip the coupons, go to the store, and redeeem the coupon you can be fairly certain that that individual is a price-sensitive individual," says University of California, Irvine economist Richard McKenzie.

Paper coupons had a good run. But somewhere in the past couple of decades, they ran out of steam. Once they started to show up everywhere — even on the store shelves — they stopped driving business like they used to. They just offered the same deal to everyone.

This is where Groupon comes in. Groupon is different in several ways. Here are a few:

  1. Huge discounts to get your attention.
  2. A time limit to snatch it up so you'll jump in.
  3. A high-tech shine: You can present your Groupon on a cellphone.
  4. Customers pay upfront.

Groupon (and its revenues) grew so quickly that Google reportedly offered $6 billion to buy it. And Groupon turned Google down.

Now the coupon rush is on. This week in New York City, hundreds of daily-deal companies came together to look for investors and make deals. The place was full of people who said things like this:

Using coupons is hip. The one thing Groupon has done for the whole space is make the coupon business sexy. Think about going on a date with your girlfriend: When was the last time you brought a coupon with you? And it's not an embarrassment anymore.

The new coupon craze does have a downside. It took 100 years for paper coupons to overwhelm consumers. In just two years, there are now more than 400 daily-deal sites. Businesses report getting calls every day from another Groupon clone wanting to do a deal.

Hilda Hampar, the burger lady, just got a call from Google. It's getting into the business and wants her to offer another burger deal. She took it. Even if it brings her only 10 people, that's 10 new potential customers.

And if the lines are out the door?

"Let them wait," she says.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, Host:

One deal Google could not pull off was a bid for the online coupon company Groupon. Start-ups like Groupon and LivingSocial offer coupons by email, and they're fueling what some call a new tech bubble.

Robert Smith from NPR's Planet Money team looks at these newfangled daily deals to see if they'll suffer the same fate as paper coupons.

ROBERT SMITH: How much would you pay for this burger?

HILDA HAMPAR: On the Slope Burger, we have lettuce, tomato, pickles, onion rings, cheddar and bacon.

SMITH: At Corner Burger in Brooklyn, Hilda Hampar charges $9.25. It's fair for New York, but it's not packing her restaurant so she made a deal with Groupon. They sent out an offer to their thousands of subscribers: $18 worth of burgers and fries for just 9 bucks.

HAMPAR: Oh, you should see the next day the coupon came out. This place was full. People was waiting outside.

SMITH: Good news, except for one daunting piece of math: Groupon gets half of the 9 bucks. That leaves only $4.50 for Hampar to pay for the food and the overhead. For Corner Burger to make money, they had to squeeze something more out of the coupon customers.

HAMPAR: If they come and spend exactly $18, then I don't make any money. But If they come in table of four, they spend 50, 60, $70, I do make a profit.

SMITH: And even better, the Groupon might convince some of the more cheapskate customers, we should we call them, to give Corner Burger a chance.

Economists call this price discrimination, the ability to sell the same product to different customers depending on how much they're willing to pay.

This was always the principal of haggling.

(SOUNDBITE OF MOVIE, "MONTY PYTHON'S LIFE OF BRIAN")

ERIC IDLE: (as Harry the Haggler) This bloke won't haggle.

Unidentified Man: Won't haggle?

SMITH: Monty Python's "Life of Brian" got it exactly right.

(SOUNDBITE OF MOVIE, "LIFE OF BRIAN")

IDLE: (as Harry the Haggler) Come on, haggle.

GRAHAM CHAPMAN: (as Brian) All right, I'll give you 10.

IDLE: (as Harry the Haggler) That's more like it. Ten?

SMITH: Haggling back in the day had perfect price discrimination. You could size up the rich folk and jack the price or lower the price for some poor guy walking away. Each time, you maximize your profit.

In the 1800s, though, with giant department stores opening, it became more efficient to post a single price. But merchants still wanted that haggle. They wanted the cheapskates, so they invented coupons.

Richard McKenzie is an economist at UC Irvine.

RICHARD MCKENZIE: If somebody is willing to scan the newspapers, clip the coupons, go to the store and redeem the coupon, you can be fairly certain that that individual is a price-sensitive individual.

SMITH: Oh, paper coupons had a good run. But somewhere in the last couple of decades, they ran out of steam. Once coupons started to show up everywhere, even on the store shelves, they stopped driving business like they used to. They just offered the same deal to everyone.

And this is where Groupon comes in. Groupon promised a different kind of coupon: huge discounts to get a lot of attention, a time limit to snatch it up, and a high tech shine - you can present your Groupon on a cell phone.

The company and its revenues grew so quickly that Google reportedly offered $6 billion to buy it, and Groupon turned them down - but it meant the coupon rush was on.

This week in New York City, hundreds of daily deal companies came together to look for investors and talk shop.

Kirk Barrett is with Double Take Deals.

KIRK BARRETT: Using coupons is hip. You know, the one thing Groupon has done for the whole space is made the coupon business sexy. When you think about going on a date with your girlfriend, when was the last time you brought a coupon with you? And it's not an embarrassment anymore.

SMITH: This was in a sense a cooler kind of price discrimination - bringing in the young and the wired.

But the new coupon craze has a huge downside. It took 100 years for paper coupons to overwhelm consumers. In just two years, there are now more than 400 daily deal sites. Businesses report getting calls every day from another Groupon competitor.

Patrick Albus, with KGB Deals, says that already it seems like the huge discounts aren't sustainable.

PATRICK ALBUS: And you'll see other merchants where it makes sense for them maybe not to offer a 50 percent discount but maybe to do something around 25 percent.

SMITH: The real question is whether or not the daily deals like Groupon are really bringing in new customers or just breeding a generation of deal hoppers ready to move on to the next discount. Things are already changing in the space too quickly to tell.

In fact, Hilda Hampar, the burger lady, just got a call from Google. They're getting into the business soon and want her to offer another burger deal. She says, why not?

HAMPAR: Come on, if it brings me 10 people, 10 people is 10 people. If it brings me thousand people, thousand people is thousand people.

SMITH: If the lines are out the door?

HAMPAR: Let them wait.

(SOUNDBITE OF LAUGHTER)

SMITH: A packed restaurant, she says, is the best advertising.

Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright NPR.

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