Pricing Lessons from a Groupon

Last week, I had a lovely "prix fixe" dinner with my wife at a very good steak restaurant for 50% off, courtesy of Groupon. The Groupon was definitely valid when I noticed it, but the terms and conditions required that you check with the restaurant for a particular date, just to make sure it was available and open. I called, spoke with the hostess.

"Sure, it is valid, and tonight is fine, but we stopped selling that groupon a month ago. You can redeem it if you bought it, but you cannot buy it any more." I didn't bother arguing with her - after all, I had just spent the money - but I found it strange. What are the chances that an expired promotion not only would be available but would be the prime promotion on Groupon for that day? Of course, I knew otherwise, since I had successfully bought it.

I checked again a few hours later, and the Groupon was still available for sale.

Apparently, the restaurant owners either intended to limit the sale to certain dates and failed to do so, or intended to go back and cancel it later and plain forgot. Either way, it shows the power and danger of flash sales, and just about any form of promotions.

A seller creates promotions - Groupon, discounts, whatever they are - in order to drive revenue, market share or awareness in a particular set of circumstances. If the restaurant intends to be 50% off all of the time, it won't do a Groupon; it will simply slash prices and be done, or constantly run promotions. Of course, there is an element of price discrimination, which allows them to capture those who would not have gone without the discount at the discount price, and also others who are willing to pay more at the full price.

But those promotions and discounts are a double-edged sword. When those circumstances no longer are extant, it is important to stop the promotion, or they will take on a life of their own. Clearly this happened.

Second, it is important to be careful to strengthen the element of time-boundedness of the promotion. People quickly learn to expect promotions, and then refuse to buy any other time. Will I go back to this restaurant? Probably, but at full price it is quite expensive, and will be a rarity. For example, I buy all my dress shirts from Brooks Brothers, as the quality is excellent... but only during their twice-annual sale. They are worth the relatively small premium during the sale, but not at the regular price. If you aren't careful, people learn to value your products and services only at the promotional prices.

Striking the balance between offering sufficient promotion to capture the more price-sensitive consumer and avoiding expectations of constant discount, and the balance between offering incentives when beneficial given the circumstances and removing them in a timely fashion - neither too soon nor too late - when circumstances no longer dictate their placement, is one of the great challenges in pricing.