Psyched to Buy, in Groups

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Groupon

You might think that this column is about Groupon.com, the white-hot Web site whose coupons save you 50 to 90 percent at local businesses. But it’s not. It’s about psychology.

Each day, Groupon offers for sale a deep-discount coupon from a business in your town. It might be a $25 coupon that buys you a $50 bike tune-up, or a $40 coupon for a $90 massage, or $25 for $100 worth of fitness classes. The coupons aren’t actually distributed until a critical mass of people (50, for example) have clicked “Buy.” After all, shopkeepers can’t afford discounts that steep unless there’s something in it for them.

If not enough people express interest, the deal dies. No coupons are issued, and nobody’s out a cent.

Groupon is, therefore, a huge win-win-win. You save eyebrow-raising amounts of money. Local businesses pick up a landslide of new customers overnight without doing a lick of marketing on their own (a Phoenix aquarium, for example, sold 10,000 tickets in 24 hours). And Groupon collects half the money from those coupons. No wonder it became profitable after only seven months.

Now, this concept — Internet-organized group buying — has been tried many times before. Remember MobShop? Mercato? LetsBuyIt? They all worked, in principle, the same way.

But Groupon is suddenly everywhere you look — in the headlines, on Facebook, in dinnertime conversations. The company says that it operates in 175 North American cities and 500 overseas, has 54 million members and has saved them $1.6 billion so far. In fact, Groupon is the fastest-growing Web company in history, having attained a $1.5 billion value in only 18 months.

(On the other hand, not all of the dinnertime conversation about Groupon is positive. The company’s SuperBowl TV ads last weekend backfired. One seemed to belittle the oppression of Tibetans under Chinese rule — “The people of Tibet are in trouble. Their very culture is in jeopardy. But they still whip up an amazing fish curry!”— and struck many viewers as juvenile and insensitive.)

Frankly, I couldn’t understand the big deal about Groupon. Why is it such a superstar when so many competitors labor in obscurity?

The answer: clever psychology.

First of all, Groupon’s sales staff tries to cultivate deals that suit the audience in each city. If you’re in San Francisco, you get offers for Segway tours of vineyards, flying lessons and skateboarding gear. In New York City, you’re more likely to see huge discounts on music lessons, theater tickets and interesting restaurants. In most cities, you’re likely to spot lots of deals for spas and cosmetic surgery, which hints at the upscale female customers who constitute Groupon’s biggest buyers.

In suburban Connecticut, where I live, I saw offers like “$10 for $20 worth” of Italian food at a restaurant nearby, “$15 for $30 worth of dry cleaning,” and “$10 for $20 worth” of goods at Barnes & Noble . Since that’s all stuff I’d buy anyway, I took the plunge. I bought the Barnes & Noble coupon and the restaurant coupon.

A few hours later, I received my coupons by e-mail. They pointed out that I could avoid printing the coupons if I used the free Groupon app for iPhone or Android phones.

At the bookstore, I picked out a couple of books totaling $23. I showed my phone to the cashier, who had been trained to enter the Groupon codes. I was the ninth person that day to cash in.

I paid the $3 overage, and that was it. I loved it. I’d just gotten $10 worth of books free. It almost felt as if I’d shoplifted.

More psychology, of course. It’s absurd that I should have felt so giddy. I mean, is saving $10 such a landmark event? The last time you bought a house, a car or even a night at a hotel, did you haggle for another $10 off? You probably could have gotten it. But you didn’t.

Somehow, though, in the Groupon context, it feels like a steal. There’s something about the simple phrase, “$10 for $20 worth of stuff” that gets you.

Furthermore, your coupon is good for anything in the store. It’s not the same as a Half-Off Sale, where the store chooses what goods to discount.

That “tipping point” business — the minimum number of takers an offer has to have before it becomes valid — is part of the psychology, too. Sure, this element was created to protect the merchant’s interests. But let’s face it, the tipping-point requirement adds a certain thrill to the proceedings. You’re invested in the outcome.

Even the scarcity of deals — one each day — plays on your feelings. It adds to that sense of exclusivity and of serendipity.

BEYOND THE FINE PRINT

So does the Groupon editors’ whimsical description of each deal. (“A beloved book is like an old friend: full of familiar stories, rich in endearing details and just as enjoyable when covered in highlighter,” began the Barnes & Noble coupon. “Make a new literary acquaintance with today’s Groupon.”)

Finally, Groupon also seems to be extraordinarily free of red tape and clutter. The fine print is labeled “The Fine Print” in a big bold font, and there’s not much to it: usually just an expiration date and “Limit one per person.”

In truth, there is more fine print. But it describes the whole concept, not any one particular deal. A few things can go wrong.

The biggest gotcha is that expiration date. Oh, it’s plenty generous — usually six months to a year. But you know how people are with coupons; we forget them. We lose them. Once again, Groupon has built psychology into its business model. Every time someone forgets to use the coupon, that’s free money for Groupon and the merchant.

Some Twitterites complained that Groupon’s overwhelming something-for-nothing appeal persuades them to buy things they’re not actually interested in. (Kind of hard to blame Groupon for that one.)

Then there’s the Groupon Effect. Groupon lore is rife with stories of small businesses swamped by the response — a yoga studio, family photographer or helicopter-ride outfit getting 1,000 calls a day, for example. That kind of overload isn’t a win-win-win; it’s a mess. (Groupon now encourages susceptible small businesses to set a maximum number of coupons for each deal.)

Finally, the occasional deal goes wrong. When I asked my Twitter followers (I’m @pogue) about their Groupon experiences, most — both customers and merchants — were ebullient. But a few reported flawed transactions, shelves picked clean by Groupon hordes and businesses that had gone under since the coupon was offered. (Groupon issues prompt refunds in that case.)

But never mind all that; this Internet trend is on fire. Groupon imitators are everywhere.

For example, LivingSocial, Groupon’s closest competitor, is in 175 cities and says it has 20 million members who have saved $300 million. Its also offers sub-services dedicated to deals for family activities and fixed-price travel getaways.

Then there’s BuyWithMe (12 cities; you have a week to buy rather than a day); BloomSpot (eight cities, several offers a week); CrowdSavings.com(six cities, no tipping point); GiltCity (six cities; luxury stuff like restaurants, spas, museums, galleries; no tipping point); Jasmere (price goes down the more people buy in). That doesn’t even count Weforia, Coupme, Groop Swoop, Groupalia, TownHog, TeamGrab, Agenzy, DailyQ, Tippr, Woot, Ideeli and eWinWin. Like Groupon, most give you financial kickbacks for roping your friends into getting involved.

These group-buying sites represent an effective, no-strings blessing in tough economic times. You really should try them. There’s very little risk, and an enormous upside: the triumphant feeling of having gotten something for nothing.

And now, if you don’t mind, I have to wrap this up. I’m off to order $50 worth of Italian food that I bought for $25.

David Pogue is a columnist for the New York Times and contributor to CNBC. He can be emailed at: [e-mail].