Pricing online - Groupon as a business model

Written by Masters Student at Lund University

There are many factors of difference between the online and offline market. The most obvious is the lack of physical contact between buyers and sellers which can create a greater lack of trust than when dealing in a physical setting.

Since the Internet can be accessed from anywhere at any time a retailer who deals in the online channel has a larger market than any retailer that only plays in the physical field, which also results in stronger competition. Many bricks-and-mortar retailers have extended their business models with an online channel thus becoming multichannel retailers because of the rapid growth of the Internet and consumers’ growing acceptance and fascination of online shopping (Deatsch, 2013; Kril, 2013).

The Internet has fast turned into becoming the new place to be for retailers and they can no longer afford to be absent. Many shopping centers are hurting and reporting decreasing results, all though many reports suggest that consumers are not buying less – they are buying online instead (Spooner, 2011; Brad, 2012; Mahapatra, 2012).

The Internet has also caused new business models like participative buying to emerge due to the new characteristics of the electronic environment. New pricing strategies have also developed (Zentes, Morschett & Schramm-Klein, 2011). Pricing differ in several ways when done online instead of in physical stores. This must be acknowledged by the e-retailers when pricing their goods or services. (Bakos, 1998; Baker, Marn & Zwanada, 2001; Ratchford, 2009)

Since e-commerce constantly is developing there are many areas that have not been researched and theories are constantly evolving because of the advancing technology, therefore there are many questions in the area that remain unanswered.

Research question

Group buying sites like Groupon are relatively new actors on the marketplace even though group buying in some way have existed for a long time. What is different with Groupon is that the price for the service or good is fixed in the auctions. As long as the desired number of consumers want to buy the deal it is on. The deals that are sold have high discounts and are very beneficial for the consumers, but the question is if the seller and the buyer have equal benefit of the deal?

Theoretical framework

Pricing online

Pricing on the Internet is different due to a number of aspects. There are increased product and price transparency, increased information attainable for and about buyers and sellers, increased interaction between the marketplayers because of social media, there is a lack of personal contact which can result in trust issues and a greater perceived risk, and there is increased competition due to the larger size of the market. (Bakos, 1998; Ratchford, 2009)

E-markets also differ because they make it possible to customize and personalize both products and prices for consumers since sellers easily can obtain personal information from the individual buyer. Due to the highly flexible price setting possibilities that have evolved online companies can engage in price discrimination at a whole new level since menu costs are close to zero and can be changed for every customer's requirements. (Baker et al, 2001; Leleop & Devereux, 2001)

New business models have developed to make use of the new possibilities the online environment provides. One major e-commerce business model is the brokerage or commission-based model that can take the form of auction sites or group buying sites like Groupon. What these seemingly different sites have in common are that they work as intermediaries and bring sellers and buyers together and facilitate transactions. (Lumpkin & Dess, 2004; Rappa, 2010; Zentes et al, 2011) These sites also make use of the participative pricing strategy that have become much easier on the Internet since it makes it possible to interact with marketplayers in real time from anywhere.

Group buying is a participative price strategy where the individual buyer together with the collective buying power of a whole group can get great deals from sellers which in turn diminish their cost of recruiting new customers, thus creating a win-win situation (Li & Liu, 2012). This is usually done by having consumers bid for a good, and then as more bids come in the lower the price gets. This form of group buying can lead to that consumers strategically collude to make the price as low as possible. (Chen, Chen, Kauffman & Song, 2009) The other from of group buying is when a certain number of consumers must buy the deal for it to activate. The deal is usually set at a fixed price which ensures the seller of what he will earn and the buyer can decide immediately whether to buy or not. In this way the buyers also collude but not in the opportunistic way as in the first example.


Groupon is one of the major players using the group buying strategy. It has combined it with social networking which means that its customers share and recruit new customers to try its deals using social media such as Facebook or Twitter. In this way Groupon takes advantage of the unique features of the online environment in order to reach as many people and potential customers as possible. Groupon recognizes that the social media environment is more or less consumer controlled and knows how to deal with this fact to reach success (Hoffman & Fodor, 2010; Meerman Scott, 2010; Gilman, 2011). It offers its buyers highly discounted, national, local, daily and time limited deals and offers companies a guaranteed number of customers and promotion through its website.

Loyalty and consumer behavior online

If companies not acquire the right kind of customers they will not last for long. The cost of attaining new customers can be several times higher than the cost of hanging on to the company’s current customers. Price sensitive customers who always look for the lowest price tend to be switchers that are indifferent of what they buy or what brand or company the product or service comes from. They have no loyalty. (Pelsmacker, Geuens & Van den Bergh, 2007; Kotler & Keller, 2009) Loyalty is about earning trust and to make the customers wanting to come back for more. Customer retention is the key for a successful company, this is true both in the online and offline marketplace. (Reichheld & Schefter, 2000)

People behave in different ways online just as they do in real life. Therefore they have certain behaviors regarding their shopping habits. Scarpi (2012) writes about two types of consumers online; the utilitarian and the hedonistic consumers. The utilitarian consumers seek rationality, are goal oriented and consider shopping as a necessity. They tend to come back and use the same online shopping sites repeatedly whereas the hedonistic shoppers shop because they enjoy it, are curious, are more likely to act spontaneous and are not that bond to specific websites. (Scarpi, 2012)

Critical review of the literature

The literature read for this paper is mainly academic research papers, but information is also gathered from course books and the Internet. The sources are reliable in the way that they are well-known and recommended by professors and peers, but since no real survey was done in the objective of writing this paper all the gathered information is written for other purposes which can lower the credibility and validity to some degree. The working paper presented in the empirical material is done for the purpose of investigating Groupon, but it is not done to solve the purpose of this paper. The data collected for the working paper can therefore be difficult for an outsider to validate.

Selection of empirics

To conduct this research a working paper written by Dholakia in 2010 about Groupon have been reviewed. Groupon's deals have also been mapped and discussed with fellow students the last three weeks as well as the activity on their Facebook page have regularly been followed.

Empirical material and discussion

Information and data have come forward which show that most of the companies that have used Groupon claim they would not do it again. This strongly argues against the theory that group buying creates a win-win situation both sellers and buyers. The majority of the sellers would not use Groupon again because the experience was negative since they could not retain the Groupon customers (Dholakia, 2010).

The sellers clearly see Groupon as a promotional tool to generate more visits or transactions while the customers see Groupon as a way to save money. The sellers are looking for opportunities to create returning customers and Groupon can not leverage on that point. The data collected from the paper written by Dholakia (2010) provides information that together with the theory about disloyal price sensitive consumers proves to be right; bargain seekers are disloyal. They are in for their own economical win and not the fascination of trying a different provider of the service or product.

The deals are only online for a limited time which creates a sense of urgency among the consumers and the purchases are often spontaneous and have little thought behind them. The shoppers searching for thrills and enjoy shopping as an activity are the ones going for the deals. These shoppers are according to theory the hedonistic shoppers which are not that bound to a specific website. I state that the typical ”Groupon:er” can be said to be a hedonistic switcher, and these can be hard to turn into loyal customers. I argue that Groupon is not the perfect intermediary since it attracts the ”wrong” kind of buyer seen from the seller's perspective. During discussions with fellow students this claim can be supported since many who have bought deals not even remember the name of the place they visited for a spa treatment, the website that gave them a free iPhone cover or the name of the hairdresser that cut their hair for half the regular price.

Groupon sends out their deals every day by e-mail or their smartphone app, and every customer gets the same deals only depending on where they live. The e-mails are impersonal and not depending on what other deals that have been bought previously. This can be a reason for not being able to create loyal customers. The customers must get a reason to trust Groupon and feel like they are specially treated to become loyal. If Groupon would work on tending to their customers personal characteristics and buying behavior more the chance is that it would make customers loyal and attract new customers that not only are hedonistic, but utilitarian. If the deals were more customized even a rational shopper that sees shopping as a necessity would be attracted. The deals would then resemble something that the customer really was interested in.

Since customization easily can be done online when having a large customer base, this is not an impossible task. By discussing this issue with other students they also felt like they would not be so inclined to delete e-mails from Groupon before opening them if they knew that the content would attract them.


Since Groupon not is mutually beneficial for the buyer and the seller the business model is not sustainable in the long run. If the sellers not want to collaborate with the company again and if no loyal customers are created there is little hope for a bright future. The intermediary must first of all work to not only attract disloyal bargain hunters, but also other consumers that are more inclined to buy from the same companies repeatedly. Efforts with customizing the deals might have an effect on loyalty since the deals would be of personal interest for the consumer. 

By starting with the customers the hope is to get the ”right” kind to the seller, which in turn will be satisfied with Groupon if the number of returning customers increases. Of course the company itself must work with the customers it gains by the collaboration with its own CRM efforts to make them return. The responsibility does not lay entirely on Groupon.

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