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Groupon, Gilt, Discounts Galore: But Is it Good?

Topic: Business Management | Comments Off on Groupon, Gilt, Discounts Galore: But Is it Good?

Posted on November 10, 2010 by admin

Reposted Courtesy of Katrina Lake

There was a time when finding a discount was exciting and fun, like winning a treasure hunt. But with all of these discounting sites– from the flash sales of Gilt and RueLaLa to the daily discounts of Groupon and all of its clones– it’s quite easy to find a deal. As a result, the thrill of finding a deal has been replaced by the anxiety, agony, and fear of potential regret of paying full price.

Frankly, what brands have done by heavily discounting their merchandise and services for short-term individual profit has been incredibly myopic and potentially extremely destructive and profit eroding to the industry overall.

Let’s take jeans as an example. J Brand, Rich & Skinny, James Jeans, AG Jeans, Joe’s Jeans, Paige– ALL of these premium jeans brands have been in one of the flash sales sites that I subscribe to in the past TWO WEEKS. Literally. In today’s J Brand sale at Gilt, all of the jeans are more than 50% marked down– $89 down from $178, $79 down from $238. Why would any rational person ever pay full price?

These premium jeans brands are basically a bunch of lemonade stands on the same block. They all started at $5.00, and then one vendor decided they were going to sell at $3.00 for one day in order to take all of the business for that day. The next day, another vendor does the same thing, and then another, and next thing you know, no consumer is ever going to pay $5.00 for a lemonade again and you will only be able to sell your lemonade if you’re selling it for $3.00.

Particularly for items such as jeans which can take on commodity characteristics, this is a dangerous round of game theory and one where brands are dog fighting for short-term market share at the risk of long-term profit potential destruction.

But aren’t low prices great for consumers? I’m not convinced. MSRP prices are going to have to rise in order to accommodate room for discounting, and thus there will be a greater number of price points that people are paying for the same item or service. It’s so confusing now what price you should expect to pay, or what constitutes a good price for something. Searching and shopping has become much more time consuming and frustrating. I miss the old system– one full price that feels fair, discounted after a certain amount of time to clear inventory– it was predictable, easy to understand, and required much less search or regret.

Unfortunately, I don’t see a path of getting out of the discounting cyclone without the brands colluding together to not participate in these sites or with as heavy of discounts– this, of course, is technically illegal and improbable with so many brands and retailers affected. Are we stuck with this system of commoditized impulse discount purchasing and opaque pricing forever?

About the Author: Katrina worked at PolyvoreLeader Ventures, and The Parthenon Group before becoming a student at Harvard Business School. She is currently working with a group researching how SMBs use Twitter. Take her short survey on how you shop!

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