Breaking Down Groupon's Supposed Price Inflation Scam

Groupon might be inflating prices to sweeten up sales

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Daily deals sites are already tarnished in the eyes of many, but Groupon and Living Social have at least one remaining shiny quality: Huge savings. But it looks like the 60 percent off madness might have been too good to be true. In a survey conducted by, Groupon and Living Social flat out lied about the original prices of products, inflating deals savins. "In 8 of the 10 deals we reviewed, the 'regular' prices quoted by Groupon and Livingsocial were higher than the prices quoted by the same merchants when we called them," the study finds. Thumbtack has two scary bar graphs, showing price inflation for each of the merchants. It's alarming and a pretty steep accusation. But, there are some giant grains of salt that should be taken with this data.

Teeny tiny sample size. Thumbtack says it called 10 merchants and that of that handful, eight advertised lower prices than Groupon or Living Social suggested. Considering that Living Social runs multiple deals a day in 603 cities and Groupon runs over 1,000 deals a day in 43 countries worldwide, Thumbtack didn't get a very large set of people.

Conflict of interest. Thumbtack has a reason to make Living Social and Groupon look bad. They're competition. The site lists local businesses and allows users to request bids from service professionals. Groupon and Living social probably take away some business. And this isn't the first time Thumbtack has done a daily deals site takedown.

There's some funky number stuff going on. There are a couple of possible explanations for why the numbers didn't match up. First, companies can change prices. But it's also possible, as a commenter Anon on Thumbtack points out, that the value quoted to Groupon for the deal from the business is based on the market retail price, not the actual price.

I'm sorry, but they base their prices on the equivalent of the MSRP. Go on right or any retailer and you'll see them crossing off MSRP prices by a large %, especially for certain products (e.g. wristwatches). What does that mean? Nothing much really. It's an age old marketing/negotiating strategy, called "anchoring", based on the fact that our perception of value is relative.

In the end this means that the "MSRP" price is 100. Groupon sells it for 50. The vendor typically already offers a 20% discount and sells it for 80. So it's not really 50 out 100, but 50 out 80... still a good deal. (I do agree that groupon having a higher price than the vendor is "wrong" though) 

Thumbtack responded pointing out that the survey only included services, not goods, but conceded that there might be an industry standard that's just not public.

This might not be Groupon's doing. A better deal will draw more customers, right? Sometimes businesses send Groupon false numbers, commenter Brian G. on Business Insider, which wrote up the study, explains.

As a former Groupon sales exec - and I know groupon has their share of their own issues I ran into this all the time and none of this was the sale person fault. Business always provide wrong information to the sales team. As a former sales person we always asked for proof of value and many businesses would want to inflate the price/value of their service so it wouldnt hurt them on their revenue share.

Businesses have incentives to inflate prices, apparently Groupon tries to avoid this -- sometimes it doesn't always work.

It's not really a scam. At least one business admits to doing this, but he doesn't really see it as an issue. "In my business, I use groupon. And YES, I always increase my prices. Why? After all the discounts, I won't make enough from the deal to make it worth my while," commenter OBSERVER writes at Business Insider. "This is a very common thing. WHen a store offers you 50% OFF, do you ever ask "50% OFF WHAT? I own a chain of optical stores. I am always running "BUY ONE GET ONE FREE". The public is so stupid that they never wonder what the price of ONE is. They see the FREE and have orgasims," he continues.

Do these things happen: Yes. But it's not necessarily a malicious Groupon or Living Social scandal. Sales kind of work like this.

This article is from the archive of our partner The Wire.