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Groupon and daily deals: the 'low-fat cookie' problem

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Groupon.com/AP

(Read caption) This screen shot shows eyewear coupons for the New York City area offered by Groupon.com. Daily deal sites such as Groupon and LivingSocial have become hugely popular, but will the group discount craze last?

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If you haven’t heard about how daily deals sales are essentially taking over retail, well, welcome back from media Siberia. In just a few years, Groupon and its biggest competitors have become multibillion-dollar enterprises, spawning hundreds (maybe thousands) of copycats. Even search giant Google – which this month announced it is buying Dealmap, a daily deals aggregator with a reported 2 million users – is jumping into the daily deals’ business.

Still, there are plenty of unanswered questions about these deals. Critics have argued that the market is getting oversaturated, the numbers don't work out well for businesses, advertisers are turned off by the whole thing, and that it’s all a big bubble approaching the bursting point. But an aspect that’s oft overlooked is whether all these potential customers signing up for daily deals really like using (and continuing to use) them in the first place.

One of the key points in behavioral economics is “You get what you pay for.” To be more specific, when we pay more for an item or service, we value it more. Whether you realize it or not, you do this all the time – in all sorts of tests, people say that, for example, the high-end skin cream makes their skin look better than the chemically identical drugstore brand.

This quirk in human engineering presents an interesting dilemma for the daily deals. Sure, it’s ingrained in us to want the most for our money, and to seek ways to get more for less. But how do we reconcile those impulses with the behavioral narrative: “This thing was deeply discounted, so it won’t work as well/be as enjoyable/provide as much value as a full-priced version”?

Such contradictions can hurt brands. If we know that people inherently value something more when they pay full price for it, then we’re creating a retail market in which buyers (and sellers) are set up to stay unsatisfied.

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