The Down Low on Daily Deal Sites

March 30, 2011  |  

(Smart Money) — 1) “50% off? Not really.”:  Steep discounts are the cornerstone of the pitch for daily deal web sites such as Groupon and LivingSocial , which promise 50% off or better at a local restaurant, spa, fitness center or other shop – if enough people sign up (and pre-pay) before the limited-time offer expires. But the discount may be much less once you factor in taxes, tip and any un-covered portion of the bill.  In February, more than 3,000 Groupon users paid $10 for a $20 FTD voucher before Valentine’s Day, only to find prices at the special voucher-redemption page $5 to $10 more expensive than what other visitors to the site saw. Groupon spokeswoman Julie Mossler says the price discrepancy was unintentional, and that customers got refunds.

But critics say these kinds of price discrepancies may be an unintended consequence of the business model. Because businesses recoup so little — often just 25% of the voucher price after fees – there may be an incentive to price deals to the merchant’s advantage. “We’re starting to see some price manipulation going on, so the discount doesn’t hurt their margins as much,” says Greg Sterling, a senior analyst with Opus Research.  To avoid bill shock, check the voucher restrictions for excluded dates and any extra charges the voucher doesn’t cover, and the business’s site to calculate the total tab. Then ask yourself if it’s still a deal, even at a higher price (or smaller discount), suggests social and behavior psychologist Matt Wallaert of digital strategy firm Churnless .

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