Daily deal sites are about discounts and the best offers, which in turn imply that they exist to bring to consumers the lowest prices and the biggest savings. Ergo, it may be intuitive that, to be the market leader in a niche, a daily deal business may need to undercut its competition with margin-suppressing price cuts. The problem with this mentality is not only that it almost always results in less revenue (one might find that economics principles do not always apply in real life; the buyers do not necessarily make it up in numbers) but also that the retail pricing of deals is never the sole decision of the daily deal business itself – the merchant has a substantial say (sometimes whole say) in the pricing details.

The fact is that the customer of any daily deal business is the merchant, not the end-consumer. The end-consumer is the customer of the merchant. The end-consumer basically acts as a supplier to the daily deal business, because they aid in the acquisition of merchants as customers. Revenue is collected first by the daily deal site, yes, but that revenue is in effect passed on in whole to the merchant, who then passes a cut to the daily deal business in the form of a commission.

Pricing in the business model of daily deal businesses thus refers to the commission percentage that the daily deal business is willing to work on. Dropping your commission percentage to unhealthy levels may seem like a good idea to undercut the competition, but consider the fact that daily deal sites may be Veblen goods: their perceived value drops with their pricing. When you drop your pricing, you not only give up revenue unnecessarily but also create a negative perception impact on your offering.

The obvious solution is to start at a higher pricing; aim to be a premium daily deal site servicing local merchants with a higher-than-average commission percentage. The only thing better than cheap is good. When no merchant buys at your ideal price point, do not make your offering cheaper; make it better. Provide a range of value-added services, such as faster payment timelines, customer retention strategies, super-strict lead qualification, generous collection and sharing of buyer data, etc. Merchants do not actually want to work with the cheapest daily deal site, which probably does not even bring in enough revenue to provide meaningful value – merchants simply want to work with daily deal sites that can do their job, and do their job well.

Deals and promotions are about price discounts. To consumers, price discounts are about two things: 1) the absolute offer price, and 2) the magnitude of the discount. While the quoted offer price directly affects the bottom line of the selling merchant when manipulated, the usual price or original price does not. Yet changing the advertised usual price has a discernable effect on consumer behavior.

Consider 2 deals: a 75%-off buffet dinner at a discount price of $25 vs. a 20%-off (comparable) buffet dinner at a discount price of $20. It is not unreasonable to expect that the former deal sells better, because there is a perceived free and extra $75 in value for the former deal instead of a mere free and extra $5 in value in the latter deal. In other words, consumers perceive that, for every dollar spent, they get $3 in free value for the former deal but, for every dollar spent, they get only $0.25 in free value for the latter deal. Group buying deals work, because the usual price provides consumers with a benchmark of “how good of a deal” they are getting, though the usual price is usually just there to exploit the irrationality of consumers.

When it was reported that Lashou.com (one of China’s most successful Groupon clones) was involved in price fraud in that they regularly inflated the usual price of deals, it made us wonder if it is a common practice across the industry, not just among group buying platforms. Some regulation through the law is necessary, but we believe that, the more rampant this practice becomes, the more discerning consumers will become as well, defeating the purpose of price manipulation. In other words, the market will become smarter and, in fact, more doubtful.

As a turn-key hosted group buying solution company, we are against price misrepresentation by merchants, because it ultimately turns consumers into cynics. It eventually creates a stigma attached to deals and promotions – that they are scams. Price misrepresentation is bad business sense, and those guilty of it ought to seriously reevaluate the long-term effects of their strategy on themselves and the industry at large.