Last September, I wrote a post about group buying and how it had been transformed by the web, much like auctions found a new audience with eBay, etc… In that post, available here, I identified five benefits that firms could accrue from joining group buying schemes, namely:
1. Moving old stock
2. Attracting new customers
3. Inducing existing customers to buy more, more often or earlier than anticipated
4. Tapping into economies of scale, and
5. Managing risk
Naturally, discount voucher campaigns also carry risks, and are not suitable for every organisation, as highlighted in this fabulous cartoon/post by Tom Fishburne.
A working paper from Harvard Business School published last month reaches a similar conclusion, and emphasises that group discount vouchers are more suitable for retailers with a long-term strategy to turn the short-term losses into future profits in the future.
But a Harvard Business Review reader has now identified a possible sixth benefit. In a comment posted on HBR’s blog, reader ‘Kyleprichards’ wrote:
‘There is one aspect of the Groupons that i’m surprised hasn’t been touched on as far as i’ve seen on HBR – The expiration date. Abashedly, i’ll admit that I have paid for more than 1 Groupon and let it expire before i’ve gotten around to using them.
Of course, the retailer should prefer to have you use the coupon – and from there, they hope, you turn into a loyal lifelong customer. However, with such a steep cut due to Groupon (approx. 50% of Coupon Price) a lot of the retailers are breaking even or losing out on this deal – so you can bet they don’t mind the free cash either.’
Why do buyers fail to use their discount vouchers?
This apparently irrational behaviour is explained by the opportunity cost of time and our inability to correctly assess future costs and gains. Specifically, we tend to overestimate future benefits and to underestimate future costs. So, when we commit today to doing something in the future, we focus on the positive outcome. And when the time comes, we face the immediate costs of our plan such as taking time off work to do something, leave errands undone, finding a place to park, booking a baby-sitter, and so on.
It’s the same mechanism that leads more tourists than residents to visit local attractions, why gift card receivers fail to use them, or why season cardholders visit leisure parks only a couple of times a season. If you would like to know more about this mechanism, you may find this article by Shu and Gneezy interesting: Procrastination of Enjoyable Experiences.
Did you join the discount voucher bandwagon? What other costs and benefits can you identify?
And do you know of any study looking at conversion rates for group discount vouchers?