Adam Lashinsky, of Fortune magazine, has an interesting piece on Groupon that is wrapped around his interview with Eric Levkofsky, one of Groupon’s founders and one of its two co-CEOs today.
It makes for an interesting read. But what jumped out of it for me was this:
What’s more, Groupon thinks it has a whole new approach to retail pricing. Jeff Holden, an Amazon veteran who heads product development for Groupon, suggests that Groupon can use its giant merchant and customer rolls to introduce dynamic pricing that mimics the success of airlines. It’s “completely ridiculous,” says Holden, that a restaurant would charge the same for a meal on an evening when the joint is empty than when it is jammed. Airlines figured this out a long time ago, and restaurants, using Groupon’s ability to target local customers, adjust their pricing opportunistically. “There’ll be a street price and a Groupon price,” says Holden.
Now, dynamic or “demand-based” pricing is one of those things that makes great sense on paper and some sense in practice.
Airlines use this of course, as the excerpt says. And scalping, for movie tickets and sporting events, is the market’s response to the lack of dynamic price setting on the part of authorized ticket sellers. In fact, in markets where electricity is dynamically priced, there is even some evidence that consumers respond in intended ways. So far, so good.
But restaurants selling a steak for $64 on a Friday evening but dropping it to $32 on Mondays and Tuesdays?
In theory, based on basic laws of supply and demand, such a scheme should smooth out demand over the week and everyone comes out ahead. But in practice, I highly doubt if that’ll work because it collides with consumer behavior.
We go to restaurants not because of the “utility value” of ready-to-eat fresh food (alone). Instead we go because we value the whole restaurant “experience”. We go because a crowded, hard to get into place signals quality and scarcity in our primal brains. And so many of us go towards the end of the week and over the weekends because we have the luxury (or the illusion, depends on how you see it) of time.
What this means is that while many of us are OK with flying (for leisure) on off-peak days between inconvenient airports to save money, not many of us (a few might) are going to visit restaurants on off-peak days, at inconvenient times, just because the food is marked down by 50%. And that is even if the restaurants were to rashly sign up to gain a predictable discounter’s reputation.
So how exactly does Groupon plan to change consumer behavior on such a massive scale?