Pricing

Groupon: A Lesson in Bundling as a Pricing Strategy

By Colin Carroll
June 16, 2011

There is a new burger joint in my neighborhood. Limited menu, but great food cheap ($4.50 for a cheeseburger). I’ve gotten into the habit of taking my son over there on Saturdays for lunch. Last month the place did a Groupon. My wife saw it and bought me one ($6.00 for 2 burgers). Great……but wait.

A coupon is effectively a discount off of list price, granted for a defined time period, and a valid pricing strategy. The Groupon, $6 for 2 burgers, is effectively a volume discount, or a price bundle, also a valid pricing strategy.

However, I don’t need two burgers. My son is happy with tater tots. Also, at the risk of sounding grumpy, the place has become really crowded. I’m going to stop going on Saturdays. I will still go, but less frequently and only on weekdays. The lesson? Poorly designed price bundles can cannibalize existing revenue streams.

What is the objective and purpose of a Groupon?

Penetration pricing, sure….to expand share. Makes sense, especially if the variable cost of the incremental product, the second hamburger is low. Bundle two together and enjoy a volume discount. But does this promotion expand revenue? Does it bring in new business, or cannibalize existing revenue?

I thought the place was a bargain at full price. The Groupon has succeeded only in attracting a temporary, more price sensitive customer at the expense of full price customers. I can’t imagine I’m the only regular put off by the long lines.

Before undertaking a strategy of penetration pricing, the seller should be sure that they can handle the incremental volume. The place did not add a second register, which might have helped alleviate the ordering bottleneck, and now lines are out the door.

Bundle discounts can be used to sell additional volume to existing customers, expanding share of wallet, but you had better be sure that existing customers want a second burger, or that good customers will bring a friend, or you risk making customers price sensitive where they were not before.

Would have a Groupon for a mixed bundle have worked better? A mixed bundle is designed to drive sales of a solution, the burger-tater tot-soda combination, reducing transaction costs and expanding share of wallet. Wouldn’t a full-lunch bundle have made more sense here? A mixed bundle would have encouraged many burger-only customers to upgrade. Similarly, a burger and hotdog bundle might have worked, encouraging me to try something new.

In fact, the original bundle deal was the highly-successful Happy Meal – with a high willingness-to-pay leader product, the hamburger, driving sales of two lower-willingness-to pay filler products, fries and soda. My burger place could have learned from McDonalds’ proven price bundle. Instead, the real beneficiary of this Groupon is turning out to be the café next door, suddenly full of customers fed up at the lines for a burger.

– Colin Carroll

  • Penetration Pricing , price bundles , Price Management , Pricing Effectiveness , Pricing Strategy , Strategic Pricing , Value Realization , vendavo

    Colin Carroll

    Colin Carroll has over 15 years of experience helping manufacturers implement and automate price and margin management best practices. Colin is currently a Pricing Expert at McKinsey & Co. Prior to joining McKinsey, Colin was the VP of Business Consulting at Vendavo. Before joining Vendavo, Colin was a pricing strategy consultant in addition to eight years at International Paper Company in a series of sales and marketing management positions, including Marketing Manager, Catalog Segment and Marketing Director, Publication Papers. Originally from Buffalo, New York, Colin has an MSE in Operations Research and Industrial Engineering from the University of Michigan and a BA in Mathematics from Binghamton University.