GRPN-LogoBusiness Insider published an article called: “Busted: Groupon and Living Social Caught Inflating Regular Prices to Make Deals Look Better”. The article referenced a “case study” by Thumbtack.com called, “Are daily deal discounts inflated” which claimed that in “8 out of 10 deals we reviewed, the ‘regular’ prices quoted by Groupon and LivingSocial were higher than the prices quoted by the same merchants when we called them.” As an avid daily deal user this raised a lot of questions in my mind and so I decided to look into their study and conduct one of my own. After investigating Thumbtack’s sampling method and conducting my own survey of daily deal offerings, I concluded that the sampling by Thumbtack was heavily biased and although some prices are inflated, Groupon and LivingSocial are not deliberately inflating deal prices to “make them look better.”

Thumbtack’s Bad Science

Neither Business Insider nor Thumbtack discussed how the 10 vendors were selected for the study. Thumbtack’s “case study” looks professional and includes several graphs and a brief note on their methodology which doesn’t reference their sampling technique. It wasn’t until I read a reply to one of the comments on Thumbtack’s article (which was posted a week after the article was published) that I was able to determine that their sample was not random. In their reply to a comment about the validity of the article, Thumbtack stated “we looked only at deals in the local service industry – house cleaners, painters, photographers, etc.” This detail dramatically changes the context of the “study” as well as any major implications that can be drawn from it.

The fact that Thumbtack published the results after sampling only 10 vendors is one red flag that needs to be considered when assessing the validity of Thumbtack’s “study”. Although Business Insider noted this limitation, they did not mention the biased sampling technique and proliferated the misinformed conclusion Thumbtack was trying to make.

thumbtack-logoThumbtack.com is a competitor of Groupon, LivingSocial and the other daily deal sites that offer discounts on local services. Thumbtack allows internet users to list a local service they require, and allows service providers to bid on the contract. The offerings that deal sites provide, from local service providers, creates competition for Thumbtack. This sheds some light on the two articles Thumbtack has published attempting to undermine the daily deal industry (stay tuned for my review of the quality of Thumbtack’s other article on the daily deal industry).

Intentionally inflating prices to deceive customers is an unsustainable business practice for Groupon and LivingSocial. A daily deal site relies on establishing a base of repeat customers and these sites go to great lengths to establish a relationship of trust. This is especially true for today’s ecommerce websites where negative reviews and opinions are just a couple keystrokes away. Bad reviews can go viral if similar dissatisfaction is shared by members of an internet community.

Does Deal Value Inflation Occur?

I believe that Groupon and LivingSocial make every effort to accurately represent the value of a given deal, but there are two scenarios where the value published for a daily deal offering may be higher than a quote from the same vendor over the phone.

1. A former Groupon sales executive replied to Business Insider’s article and said that there is incentive for executives to inflate the value of a deal because they are under “pressure to meet their ever-increasing sales quotas.” Additionally, since these sales execs are compensated in part by commission, increasing the published value of a deal could lead to a higher number of sales in the short term (as long as this isn’t communicated to potential buyers who would be turned off by this deception). In an interview with Andrew Mason (Groupon’s CEO) he stated that each deal is reviewed by at least seven employees prior to being approved for Groupon’s website. All deal sites are highly motivated to review potential deals from their sales executives to ensure that the offering is accurate and suited to their users. Despite these efforts, it is conceivable that some price errors slip through the review process. However, given the review practices established by sites like Groupon and Living Social this isn’t likely to happen often.

DailyDEAL2. Merchants are required to share the revenue that Groupon and Living Social collect from each deal sold. Often merchants receive only 50% of the revenue collected. This means that if the daily deal offering is 50% off the regular price, the merchant is collecting only 25% of the regular price. The 75% that the merchant forgoes is analogous to an advertising expense, except in this case, they can measure and set a limit on how many customers their advertisement campaign brings through the door. With the right implementation of a daily deal campaign, merchants can establish new lifetime customers who will continue to provide valuable word-of-mouth advertising. Merchants are motivated to set an inflated value and price for their daily deals to minimize the expense of running these campaigns. However, Groupon and Living Social verify the prices they are quoted by a merchant with the merchant’s website and retail stores while negotiating an offering. A problem arises when you consider independent service providers who don’t have a publicly available price list. These companies include independent house cleaners, painters, and photographers that don’t have a website or storefront with a set price list. Their prices are often flexible and may be influenced by the current demand for their services, the size of the job, the demographics of the potential customer and a variety of other variables. With flexible pricing, it is difficult for Groupon or LivingSocial to accurately verify the price of these services which can vary on a project-by-project basis. In these cases, the price that a service provider conveys to Groupon or LivingSocial may be higher than the price that the same service provider would quote to a potential customer over the phone on a given day.

Groupon and LivingSocial are making their best efforts to overcome these two factors. First, they are selective as to which businesses they partner with to provide daily deal offerings. They frequently turn down small and medium sized businesses based on the standards they employ. Groupon and LivingSocial are very transparent when it comes to the contact information of the service provider. They always provide the merchant’s phone number and website (if available) so potential customers can contact the merchant with any questions they might have. In addition, the former Groupon Sales Executive that Business Insider referenced indicated that Groupon and LivingSocial are developing databases with accurate merchant pricing to help them confirm the value of potential offerings.

My Deal Value Study

With the help of The Deal Pages’ database of previous deals from Groupon and LivingSocial, I was able to conduct a survey of my own to better determine the frequency of inflated deal prices. I randomly selected expired deals from Groupon and LivingSocial between July 1st, 2011 and October 1st, 2011 (a period within the range of dates from the “case study” by Thumbtack.com). I assigned each city The Deal Pages operates in a number between 1 and 298 and used the RANDBETWEEN excel function to create a random list of cities. I used another excel function to randomly choose a date within the stated range. If Groupon or LivingSocial had multiple offers in the random city on the random date, I used another excel function to randomly choose one of the offerings. If no offerings were available using these random variables, I went down to the next city in my random city list. Once I had a list of 30 randomly selected offerings (15 from Groupon and 15 from LivingSocial), I called the merchants to request a quote for the service they had offered in their daily deal offering (I made no mention of the daily deal unless I was asked if I had a coupon from Groupon or LivingSocial).

The Results

Of the 30 merchants I contacted only three of them quoted me a price over the phone that was less than the price that was listed in the daily deal offering. All three were from small businesses and two of the three were from merchants who mentioned that the price is dependent on a variety of factors. For example, a car wash that listed it’s offering at a value of $100 quoted me $80 over the phone after I informed them that the car I wanted washed was a Lincoln LS. It is possible that had I told them that the wash was for a more premium model of car and/or a larger vehicle, the price quoted would have been closer to the $100 value that was listed. Another merchant that gave me a quote lower than the value in their offering was a hair salon that informed me that their rates vary by stylist. Consequently, the rate I was quoted was from a specific stylist and it is likely that other stylists in the salon charge a price that is in line with the price quoted on their deal offering. See Table A for the deal values and quotes I received for my study. If you are interested in the full data set or have any questions about my sampling technique, leave a comment below or contact me at dave@thedealpages.com.

As with any study, there are some limitations and questions that remained unanswered. I would have liked to use a larger sample and I may conduct another study with a larger sample to get a more statistically reliable answer to the question of how frequently deal values are inflated.

As I mentioned, a week after Thumbtack published its article, it replied to a comment stating that they only sampled deals from local service providers. According to Thumbtack, these offerings make up 11% of all the offers from Groupon and LivingSocial. Did Thumbtack.com randomly sample all of the offerings from local service providers or did they selectively choose ten merchants? Is the phenomenon of deal price inflation an increasing or decreasing trend? Even if the rate of inflated deal prices was close to 10% when Thumbtack.com did its survey, I suspect that the rate will decline as Groupon and LivingSocial build their merchant/price databases and impose better deal review controls.

Conclusion

In conclusion, Thumbtack’s article was deceptive and the numbers it presented were based on biased sampling that was not specified in its “case study”. Price inflation does occur among a relatively small percentage of daily deal offerings but it is most likely due to the flexible pricing of small business owners and not due to deception by Groupon or LivingSocial. Daily deal companies are highly incentivized to accurately represent their offerings to encourage repeat buying behavior and they are imposing methods to reduce the frequency of inflated deal prices.

Do 8 out of 10 Deals from Groupon and Living Social have inflated values to deceive customers?!

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