Agreeing on Groupon

Harry Truman famously begged for a one-handed economist. Why? He was sick of his economic advisers saying “on the other hand.” Charles Schultz expressed similar frustration here. The idea that economists hedge their bets or disagree constantly with one another is a feature of the discipline. We see it today over issues such as the deficit and health care reform.

But right now, there is one issue on which every economist I know of actually agrees (and in an unqualified way): thatGroupon (a) should have accepted the purported $6 billion bid from Google when it had the chance; (b) that Google was insane to have offered it; and (c) that Groupon is pretty much doomed or, at least, will have fleeting glory. Put simply, the new coupon industry is following a path common to so many new markets, with a leader with initial success, a flurry of entrants (at last count some 400 competitors) and, finally, a big shakeout.

Of course, Groupon could be left standing after the shakeout, as Amazon and eBay were in days of old. But even if it makes the cut, the notion that it could earn persistently high profits seems far-fetched. Economists want to see what Groupon uniquely controls. The baseline idea — heavily discounted coupons delivered to inboxes — is easy to copy. The costs Groupon faces are not the low marginal costs of an Internet business but a business-by-business costly sales effort. Thus, there do not appear to be scale economies that could keep competitors at bay.

The main thing that Groupon seems to have going for it is a solid installed base of accounts. That’s valuable, since there are only so many accounts that consumers will want to have. But even that is not unique. A quick look in my inbox today and I have friendly emails from Yelp, Amazon, American Express, various airlines and hotels, and Groupon competitor LivingSocial (and I try hard to keep that kind of “correspondence” to a minimum). You can add to that list Facebook and Google and the many other firms that have some claim to a piece of my attention who could slip into the coupon business. (For example, I think if I could work out what Foursquare actually does it may be in this space too — like a small child I keep checking in to see if something happens, but like a Jean M. Auel novel, nothing does.) What is more, the very firms that want to provide coupons (the small and large retailers) are those that will want to encourage consumers to try out Groupon’s competitors.

That sober assessment is common and independently arrived at by what appears to be all economists — including me.

That said, when the market and economist opinions diverge, it is surely worth digging deeper to see if there is something we might have missed. After all, there is real money being transacted here. (Economists, ahem, have been wrong before.)

Let’s start by considering what Groupon’s innovation isn’t. The idea that you could sell stuff using email is, let’s face it, responsible for most email traffic in the world. So much so that most effort in email provision has been expended in stopping it. But, you could say, Groupon went further by making retailers a promise: if the retailers guaranteed a deep discount, Groupon would deliver a large number of customers before they had to discount to anyone. Even that, however, was not new and really does not appear the feature driving Groupon’s success. The volume of customers is rarely an issue.

Here’s my hypothesis about Groupon’s success. It exploits a limitation faced by many consumers: their memory.

Before Groupon, getting deals from coupons took work: the consumer had to find the coupons, clip them, and, crucially, remember to use them. And while some may have time to take it to extremes, that isn’t the case for most of us. Groupon takes lots of the work out of it. An email appears and in a couple of clicks you have a coupon, accessible from your phone. Further, Groupon reminds you if you hadn’t redeemed it. If remembering to use a coupon was your problem, Groupon is working to solve it. And if remembering to get around to taking advantage of a discount was your problem, with Groupon you can commit then and there and not need to remember anything else. In the past year, that ease has extracted $500 from me, and I’ve used every one of those coupons.

So Groupon is in the memory business. But that doesn’t give them a unique advantage. They may have invented the business, but others can work it out.

There’s also room for competitors to improve on their offering. The other week a Groupon offer appeared that I figured would be great for my spouse’s birthday, which was a few days hence (don’t worry: it was an additional, not primary, present; I’m not that bad). I clicked, but discovered it was one of those rare coupons where the retailer had lofty goals; the deal required a large number of customers to buy the coupon before the offer was in play. Not enough Grouponers bought the deal before the birthday in question, so there was no additional present for my spouse. What that tells me is that if remembering is Groupon’s business — and let’s face it, there is nothing like birthdays to exploit that opportunity — then Groupon has a ways to go in perfecting its model. Reliability is the dimension upon which Groupon’s competitors will compete, and whoever does it best will become the leader in the market.

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