Could Groupons Save the World?

Two-and-a-half year old web start-up Groupon is a stunningly successful company. It reportedly turned down a six billion US dollar buyout offer from Google in December, and Reuters reports that is now planning an initial public offering that may value the company at between $15-20 billion. It has achieved this staggering valuation with a simple business model: every day in each of a number of cities (now hundreds worldwide) it offers on its web site a deal from a merchant wanting to access Groupon’s email subscribers in the local market. The daily deal might offer such luxuries as a massage, a day of paintball, a restaurant meal or hotel stay for two, or tooth whitening treatment, at a discount of about 50-70% off the regular price. The concept is that a minimum number of people have to sign up to the deal for it to be valid, so Groupon provides a bundle of willing buyers to the merchant. In return, the merchant provides what amounts to a bulk discount. The Groupon company makes money by operating as a middleman for payments: it sells buyers a voucher for the product, and Groupon passes on some of the money it received for the voucher to the merchant, keeping a chunk of it for itself.

You might reasonably wonder how a company whose business model relies on heavy discounting and email marketing could be worth so much. Most of us are exasperated by spam, and it doesn’t take long for us to hit the unsubscribe link at the bottom of the “offers”, “exclusive deals”, “updates” and “newsletters” from our banks, supermarkets, utility companies, and assorted other corporate entities. So it’s worth looking at what makes Groupon different: why is it able to recruit and retain a reported 70 million subscribers,  and boast many satisfied repeat customers for its deals?

Part of the answer is in Groupon’s clever use of psychology. First, we humans have a propensity to desire things more when they are scarce – and Groupon’s mode of offering a single deal each day and of requiring a minimum number of sign-ups before the deal is valid adds scarcity value to it. Those who sign on to a deal early become invested in the outcome, hoping that enough other people will sign on for the deal to be valid. They already achieve a  psychological success payoff before they even take their voucher to the merchant. Second, the kinds of products Groupon markets are typically centred on experiences rather than objects, and somewhat aspirational in nature as opposed to necessities – perfect for gifts and for personal or social indulgences. Groupon fosters consumer excitement about their products by hiring writers who produce inventive, often whimsical or humorous short descriptions of them. Psychologists have shown that money doesn’t usually make us very much happier, but people are made happier by spending money on experiences like vacations and on gift giving than they are by investing in material objects like flat screen TVs. So it shouldn’t be a great surprise that many Groupon customers are repeat customers. Third, it is not always easy to get people to make a decision – especially to buy a luxury good, even if they think it’s a great deal – because people tend to procrastinate (and, if they don’t simply forget it, they often come to think better of their whim to engage in unnecessary spending). Groupon overcomes this by time-limiting each deal: act before the deal runs out, as it will be gone by tomorrow, if not before.

It would be hard to argue that there’s anything ethically questionable about these aspects of Groupon’s marketing techniques, so long as there’s no evidence that they result in swarms of poverty-stricken shopaholics. In which case, the question arises: why don’t we harness similar techniques in other domains to get people to make decisions which tend toward the public good? For example:

Source Flickr: Balga, February 2010, Women around the water pump. Author: Trees ForTheFuture (via Wikimedia Commons)

  1. A charity could use a Groupon type structure to accept donations for an aid project, such as digging a well in a drought-stricken area: donations would accepted for one day only, and the project would take place only if enough subscribers sign on. In many cases, the charity could put the resources necessary to complete the project in place in advance, so that donors receive a short-term payoff when they are emailed, for example, photos of villagers using the new well after just a week or so.
  2. Using some of the principles of Groupon psychology but not necessarily the Groupon format, authorities might be able to overcome procrastination to increase the number of donors listed on the organ donor register. Signing up to donate organs is one of the things people tend to procrastinate on in a big way. Could we give people an artificial deadline that will help overcome their procrastination? Could we increase the scarcity value of signing up? Could we tie the decision to donate to some experience that would give our potential donors an immediate payoff and a rewarding sense of success? Perhaps opening the organ donor register only on select days each year could paradoxically increase the number of signatures on it. Sending those who do sign-up a congratulatory message that demonstrates the life-saving potential of being an organ donor could encourage them to recommend their friends and families to do likewise. How about this incentive: If you sign the register by such-and-such-day, you get a ticket to see a live transplant operation take place (with a consenting patient and surgeons)?
  3. Make a time-limited offer to pay addicts to  quit. Even better, make a time-limited offer to pay addicts to quit in a group, where each additional member of the group enhances the payment to each individual (e.g. for an individual, pay £1/day, for a pair pay £2 each/day, for a group of three pay £3 each/day, and so on up to a maximum group size of, say, 20). Each group member would be rewarded for overcoming procrastination,would become invested in a joint social project, and would receive ongoing success payoffs based on the recruitment and progress of other group members.
  4. These are just a few sketchy examples – I’m sure readers can think of much better ones. But it seems to me that Groupon psychology is far too powerful a tool to waste only on fripperies and frills. We should use it also to help us get some of the things we need.

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5 Responses to Could Groupons Save the World?

  • Roger Crisp says:

    Thanks, Simon. Great ideas. On (1). In Boston, Groupon did enable people to make a matched donation to Save the Children. So if you paid $15 to Groupon, $30 would go to the charity. The top-up came from an anonymous donor. I don't remember Groupon's saying they wouldn't take their cut as usual. Actually, it was all a bit of a pain, as you had to buy the Groupon and then go to the STC website to 'spend it'. I think there's a chance that consumers may start to get irritated by Groupon and its now many competitors, since some companies seem to be pricing their products so that the only reasonable way to buy them is by using coupons and that habit may spread. They are also very fiddly to use (you have to print them out, and make sure you use them by a certain date). So if they are going to be used for the purposes you suggest, people need to move quickly.

  • Arif says:

    I think a site which uses some of the psychology is pledgebank.com and I do think that it is a great idea.

    But part of the psychology is also that people go on to groupon to gain certain experiences, ideas about themselves and payoffs which are intrinsically different from the experiences, ideas and payoffs people get from using pledgebank. Something that makes them likely to seek and use one website more than the other in order to achieve their payoffs.

    Can anyone help me put my finger on it? Something about the way one's own personal world has changed if your group reaches its target. Or maybe of the sense of having been more efficient in achieving your goals than otherwise which is hard to replicate in the donor/recipient model of world-saving. And to replicate the sense of scaricity as you suggest above (we build the well only if we get the pledges today) seems both artificial and unethical in a way which does not appear to be the case where we imagine we are helping a profit-seeking company clear its warehouse in time for its next shipment.

    The ultimate groupon to save the world (or at least what I thought the original post would be about) would be the pledge to reduce our greenhouse gas emissions (and vote for politicians who aim to achieve the same things, and consume from companies who do so to) in order to avoid catastrophic global warming which is equally in our own selfish interests too – to avoid a tragedy of the commons. However the problem in that case would be enforcement. For those who consume most, it is easier to enter credit card details in return for a luxury item that the socio-economic structure is already geared to ensuring you then receive, than it is to change behaviour in return for a hope that others do the same when the socio-economic structure is ambivalent at best in helping you achieve such goals in the end.

  • danielle jones says:

    I have to wonder about the scarcity idea when used for donations. I think Arif talked about this a little. What I mean is what would happen if not enough donations were made. Would the organization just not build the well? Ever? Also suppose there were strings of days together when the fund-raising failed. Would the time-limited spell be broken? I'm sure incorporating bits of the psychology that makes Groupon so successful would benefit charities but Groupon's combination of aggressive marketing and whimsical attitude seems ill-suited to what amounts to begging & life-or-death scenarios. Maybe. On the other hand there's no reason not to try. I wouldn't have invested in Groupon either based on the concept. It would be worth a shot to see if a charity model could be as exciting/experiential. As for buying psychology, let's not forget to target these guys: http://www.time.com/time/business/article/0,8599,2045050,00.html

  • Simon Rippon says:

    Thanks for the great comments. Arif, interesting thoughts and thanks for the heads-up about pledgebank.com, I think it's a great site, even if it doesn't use *all* the Groupon tricks!

    A couple of you suggest that there might be something unethical about a charity failing to carry out an aid project if not enough pledges are made in time. I wonder about this, and I'd like to hear more. Would it still be unethical *even if* abandoning such projects is an effective means to getting more projets completed than would otherwise be completed in the long run? That's what the theory of Groupon psychology suggests, after all. If the charity has a duty of aid and *cannot* aid everyone, isn't it best if it acts – indeed, isn't it required to act, so as to aid as many as possible?

  • G. Owen Schaefer says:

    I think it's worth pointing out that the idea for Groupon actually came from an effort to solve collective-action problems! Indeed, Groupon is a spinoff of a philanthropy site, ThePoint.com (see, e.g., a line in one blog entry: http://www.groupon.com/blog/cities/groupon-super-bowl-ads/). So yes, it would seem that the model is definitely workable as a charity. It also goes to show that sometimes, altruistic endeavors can facilitate market innovations.

    On the ethics of this model at ThePoint.com – it should be noted that most of the campaigns appear to be threshold-type cases. That is, they're designed specifically for cases where one needs a sufficient number of people for there to be any effect. Boycotts (need large numbers/organizations for corps to take notice), arts productions (half a Hamlet isn't going to turn any heads), or aid projects (can't travel to teach in Uganda without paying the full cost of a plane ticket) are the sort of causes that appear to benefit from this model. Causes won't be deprived of useful resources if a campaign doesn't reach the threshold because those resources are only useful when that threshold is reached.

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