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How Groupon and LivingSocial Celebrate Deflation in America

Why do social buying websites owe much to the Japanese practice of deflation?

July 14, 2011

Why do social buying websites owe much to the Japanese practice of deflation?

Americans have never liked comparing themselves to the Japanese. The continuing sushi craze aside, many of the features and traditions of that nation were not truly appreciated by Americans.

On no issue was Americans’ sense of disgust more direct, even raw, than on Japan’s no-growth economy, one in which economic activity was not just glacially slow, but even declining.

The most tell-tale indicator over the past decade has been goods prices that weren’t just stagnating (which consumers might appreciate), but declining across the board.

At some point, this trend becomes widespread enough that it is considered deflation, which — as much as all of us dislike inflation and rising prices — clearly is not a healthy development for any economy.

When that trend takes hold, nobody wants to invest or shop anymore, since waiting could always bring a bigger, better bargain.

Given that healthy disregard for Japan-style deflation throughout much of the American populace, it comes as a real surprise that today’s hottest Internet-based business phenomenon owes much to the Japanese practice of deflation.

How else to describe businesses like Groupon and LivingSocial? Now that Apple, Google, Facebook and even Twitter are becoming so yesterday, these social buying websites are among the nation’s next IT-based blockbuster IPOs.

LivingSocial is seeking to raise about $1 billion for its initial public offering — and in June 2011, Groupon filed for an IPO that could value the company as high as $20 billion.

What these sites offer, in essence, are deals so popular, so attractively priced that you can’t refuse them.

They might offer you $20 worth of food and drink at your city’s hottest new restaurant for only $10, or they might entice you to spend $100 for a kayaking excursion valued at $250.

In theory, the business model is based on the proposition that local businesspeople are attracted to doing deals with Groupon, LivingSocial and other copycat sites in order to get access to customers who previously were unaware of their businesses.

As the theory goes, after that first, too-good-to-pass-up deal overcomes the threshold of distance and mutual unawareness, the new patrons would turn into repeat customers for the businesses that play along.

There are only a couple of problems with that theoretical notion. Aside from the fact that we don’t really live in times in which people have discretionary income aplenty, the very core of the discount sites’ corporate identity, both in terms of strategy as well as the underlying value proposition in the eyes of their customers, is that there must be another bigger, better deal offered up tomorrow.

Customer loyalty, or vendor awareness, is basically furthest from the minds of the people participating in these Groupon pile-ons.

Contrary to the advertised strategy, what usually happens is one of two things: Either the business struggles under the sheer onslaught of the deal seekers and cannot make good on its promise, leading to a lot of frustrated customers.

Or that business, while getting mobbed, takes big losses on the initial order/customer contact, but only to experience little follow-up business thereafter.

The crowd, as the logic of the deal- and thrill-seekers has it, has marched onto the next deal, and the process repeats.

Come to think of it, these newbie sites may force a traditional corporate villain, Wal-Mart, to lose its reputation as a nasty cost-cutter.

Unlike that much more famous example, these discount sites operate like a hit-and-run Wal-Mart. They hit the business, and then the customers run away from it.

Theoretically, one could argue that, whether on Wal-Mart’s or Groupon’s end, it takes consenting adults to engage in business with these firms.

With one crucial difference: Wal-Mart does have a direct interest in turning its patrons into repeat customers for its suppliers. To that end, it zealously tracks sales, not just to cheaply replenish existing stock, but to monitor the popularity and profitability of any product in its stores.

For that formula to work even at the outset, Wal-Mart will, yes, squeeze hard on prices, but will also make a very deliberate and well-considered decision about whether the potential supplier has the potential, track record, experience and guts to deliver.

Not so with Groupon, LivingSocial and their less popular copycats. Their transactions, and their business logic, is much closer to the business of engaging in one-night stands. These firms, after all, don’t make a margin on repeat deals customers might enter into.

We live in curious times. For all of America’s contempt toward Japan’s deflationary, stagnant economy, what some of the newest, celebrated U.S.-based Internet businesses specialize in is taking Japan’s sad deflationary reality, marrying it with the spirit and glitz of Las Vegas — and selling the illusion to an all-too-credulous public.