An economist's explanation of Groupon's success
A few issues:
1. Groupon deals aren't only valid for one day, thus the restaurant owner has no idea when people are going to be in the restaurant or not.
2. I reject the notion that I restaurant owner would prefer to serve a full restaurant at half price over a half full restaurant at full price. From my discussions with businesses who use Groupon, they mostly see it as a tool to drive repeat customers not one-time customer volume. Very few restaurants can make ANY money at 50% menu price, much less at 25% menu price (after Groupon takes their cut).
3. I would be willing to bet the 'tipping point' effect of Groupon on the sharing of deals is nearly insignificant. I think a far larger driver of sharing these deals are deals that require multiple individuals to participate. (e.g. I bought a coupon with 15 of my friends to go paintballing in a few weeks)
There are problems with this strategy too. No matter how hard he tries to isolate his target audience, the owner can't really control how many people show up. Or, the numbers might turn out such that (conventional) advertising is too expensive.
I call BS on this. I have ran into many store owners(though they are rare) who have been having similar success as Groupon for years simply by giving a good damn offer in the paper. I have ran into even more who consistently have crappy coupons and get crappy results. I find very, very few who try a groupon-like offer in the paper and don't see results.
This article is typical keyboard-jockey analysis from some supposed expert.
Evan Miller (I forget his nick on HN) wrote the first - and the best - explanation of the analysis of Groupon's economics: http://www.evanmiller.org/golden-football.html
I found this analysis (previously posted to HN) a bit more rigorous and less ideological:
http://www.evanmiller.org/golden-football.html
The mechanism has some superficial similarity to 'Assurance Contracts', an economic idea for coordinating group actions that are best done all-or-nothing. However, it seems that at least now, with Groupon in its galloping stride, there's no real doubt most promotions will hit their target participation level. That is, it's more a promotional mechanism for focusing consumer attention, rather than a solution for a coordinated-decisionmaking problem.
There's room for other innovations in these areas, as well. The 'dominant assurance contract' gives an extra sweetener back to pledgers if the threshold isn't met, to make assurance contracts work for otherwise nonexcludable 'public' goods where bystanders might normally hope to free-ride after others fund. See:
http://www.marginalrevolution.com/marginalrevolution/2005/05...