Case study: Are daily deal discounts inflated?

by Thumbtack | October 13, 2011 at 9:49 am

Last week we published a study showing that many daily deals for local services (like house cleaning, handyman services, and interior painting) are priced equal to or higher than the average local price of the service.

Something in that study really caught our attention: the regular prices quoted by Groupon and LivingSocial seemed strikingly high.

We made some phone calls last week to merchants who had run deals on Groupon or Livingsocial, and it turns out our instincts seem to have been right.

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.

Of five Groupon merchants that we called, all quoted prices lower than the merchant’s regular price advertised by Groupon.

Of five LivingSocial merchants that we called, three quoted prices lower than the merchant’s regular price advertised by LivingSocial.

A quick note on methodology: For each deal we reviewed, we called the merchant and asked for their regular price on the same service offered by the daily deal. For example, if a house cleaning deal was limited to two hours of routine cleaning in a well-taken-care-of home in zip code 98765, then that’s exactly what we asked about. We never asked for a discount or a good deal. And we’re reporting here every call we made – we haven’t excluded from this post any calls we made where the merchant quoted us the same price as was advertised by the daily deal site.

11% of daily deals are for local services.

Before diving into the details, here’s a bit of background on the local services industry. The people in the local services industry are local professionals like home contractors, house cleaners, portrait photographers, wedding planners, math tutors, and graphic designers. According to Groupon, 11% of Groupon’s deals fall into this “services” category. An example of one of these types of deals is “$49 for Two Hours of House Cleaning in San Francisco – 67% Savings“.

Also according to Groupon, the company worked with 45,665 North American merchants in the first half of 2011. If 11% of these are merchants that fall within the “services” category, then Groupon featured deals from about 5,000 North American local services merchants in the first six months of 2011.

More than 200,000 local businesses have now listed themselves on Thumbtack, and about 40% of these – or about 80,000 professionals – have listed with us the hourly price they charge. For example, this wedding photographer charges $200-225 per hour for her services.

We initially started looking into daily deals pricing because we have unusual data – average hourly pricing for local services across the U.S. This data is pretty hard to come by. We thought this data could help illuminate the strange pricing trends we saw for daily deals in the local services industry.

The regular rates of many Groupon and LivingSocial merchants seemed much higher than the average local rates. So we called the merchants to get quotes and see how the quotes compared with the rate advertised by the daily deal site.

What did we find?

On September 19, 2011, Groupon offered two hours of home cleaning services in Phoenix for $49, a discount of 67% from the regular price of $150.

We called the merchant who offered this deal and asked for a price quote for the same service offered by the deal – two hours of simple cleaning in one of the zip codes covered by the deal.

The non-discounted price for the cleaning advertised by Groupon? $150. The price we were quoted for two hours of home cleaning? $80.

More than 510 people purchased a deal that Groupon advertised as regularly costing $150. But the price we were quoted over the phone was $80, 47% lower than the regular price advertised by Groupon.

Another example:

On August 24, 2011, Groupon offered carpet cleaning for a 200 sq. ft. room in San Francisco for $45, a discount of 78% from the regular price of $200.

Again, we called the merchant to get a price quote for the same service. We were quoted $160 for a carpet cleaning for a 300 square foot room.

Groupon’s advertised regular rate: $200 for 200 sq. ft. of carpet cleaning, or $1 per sq. ft.

The price we were quoted? $160 for 300 sq. ft. of carpet cleaning, or $0.53 per sq. ft. At $0.53 per sq. ft., the cleaning for a 200 sq. ft room would cost $106.

Groupon advertised the service as regularly costing $200. But the equivalent price we were quoted over phone was $106, 47% lower than the regular price advertised by Groupon.

Other examples:

Every Groupon merchant we called quoted us a price that was lower than the regular price advertised by Groupon.

We did the same for five LivingSocial deals.

On August 29, 2011, LivingSocial offered interior painting of one 12′x12′ room in Kansas City for $89, a discount of 56% from the regular price of $200.

We called the merchant who offered this deal and asked for a price quote for the same service offered by the deal – a simple interior painting of a 12′x12′ room in downtown Kansas City.

The non-discounted price for the painting service advertised by LivingSocial? $200. The price we were quoted? $150.

46 people purchased a deal that LivingSocial advertised as regularly costing $200. But the price we were quoted over the phone was $150, 25% lower than the regular price advertised by LivingSocial.

Other examples:

Two LivingSocial merchants quoted us the exact regular price advertised by LivingSocial:

Of the five LivingSocial merchants we contacted, three quoted prices lower than the regular price advertised by LivingSocial.

Has anyone else encountered this phenomenon when transacting with a merchant who has previously offered a daily deal?

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  • Zxcv

    OH SNAP!

  • Anon

    I’m sorry, but they base their prices on the equivalent of the MSRP. Go on Amazon.com 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)

    • Anonymous

      Ah yes, definitely agreed. Just to clarify, we looked only at deals in the local service industry – house cleaners, painters, photographers, etc. We didn’t look at any deals for products (most of which probably have publicly available ‘list’ or MSRP prices).

      We’re guessing that the findings above apply mostly (always?) to deals for which the “regular” price is not publicly available. This is very common in the local service industry – many small businesses or independent professionals in the local service industry do not publicly publish their rates.

  • Really!!??!

    You can’t do a study on 10 deals and claim to have confirmed anything!!! Please learn how to properly compile a statistical analysis before you claim anything. You may search 1000 more and find only 10 more of these. This study is bogus but does give reason to compile a much larger research study on it.

    • Anonymous

      Very much agree that this doesn’t show anything that’s “statistically significant.”

      Unfortunately it takes a long time to get in touch with even one local professional to get a price quote – so doing this for hundreds of deals would take lots and lots of time. We wish we had the time to do a bigger study!

      • Christy

        I didn’t see any mention of restaurant deals, and I believe if my math is correct, buying a $50 certificate for $25 is still saving 50% so the restaurant deals are straight up.  However, I did check direct for a travel deal that was being offered, and if you went direct to their site they offered lower rates than you could get with the deal with Living Social.  I don’t think they should be allowed to do this if they are using Living Social to market the vacations for them – makes Living Social looks like a rip off!!

  • http://twitter.com/wonderyak wonderyak

    Don’t those markups directly correspond to the profit percentage both Groupon and Living Social take?

    • Anonymous

      Not sure. I think they take a cut of the amount that’s actually sold?

  • Lana

    Very interesting stats. I’m wondering if you asked the merchants why they went with higher prices for the deals. My husband, who has a window cleaning business, has done deals with Groupon and LivingSocial and the deals reflect his actual regular prices. However, we have seen outrageous pricing on other deal sites.

    • Anonymous

      No, we didn’t ask that.

      Sounds like your husband is one of the honest ones. See OBSERVER’s comments here to find someone who doesn’t seem as honest: http://www.businessinsider.com/are-groupon-and-living-social-inflating-regular-prices-to-make-their-deals-look-better-2011-10

      • Lana

        Yes, he’s honest. Definitely better to run a business with integrity :-) Lying and inflating prices will only hurt in the long run.

  • DragonBoss

    If I may digress, when it is about the online retailers, often Groupon and likes are offered as a “coupon codes”, meaning that you cannot use them in conjunction with other discounts. Or they can only bee redeemed through special links. This too results on much lower real discount than advertised. Very few of them were offered as gift cards, that are basically stackable with other discounts and promotions.

    I guess it is an auto sales tactic in the Web 2.0

  • Bert

    A sampling of only 10 of the 1,000s of service related merchants that use deal sites to promote their business and do not normally post their prices to begin with does not make for a legitimate “study.” Beyond that you do not offer any proof of the prices that were quoted to you directly.  How about a written estimate, etc.  Seems tainted to me… not to mention that you guys are in competition with these deal sites for local merchant dollars so the fact that you published a bogus study against your competition seems like a poor choice on your part.  And the fact that you hide behind the “we didn’t have time/resources to do a legitimate survey” as your comments below suggest tells me that you have very little integrity as a media source for quality information.  But hey, at least you got a few people to read the article.  Maybe you should ask ten people if they believe in ghosts and if any of them answer yes you can write an article with the headline, “Proof Of The Afterlife.”

    • Anonymous

      Hi Bert,

      Your points are very well taken.

      The underlying issue we’re examining here is pricing opacity in the local services industry. That is, most people do not know – and would not know where to begin looking for – average pricing in their area for common local services like house cleaning, painting, photography, etc.

      We think consumers are harmed every day by this lack of transparency for pricing of local services.

      The post above is just one potential example of how consumers are misled by opaque pricing. Another example is a post we previously published on the daily deals industry: http://www.thumbtack.com/blog/that-daily-deal-you-bought-maybe-not-so-great-a-deal-after-all/

      However, we suspect that there are many more examples of this – perhaps far more insidious – that occur every day. In particular, we suspect that there is significant price discrimination happening in the local services industry.

      For example, it is very possible for a painter, house cleaner, or photographer to change the price they charge to an individual based on the person’s race, age, neighborhood, appearance, gender, or any of a number of other factors. We suspect that this kind of discrimination happens every day, and it is only possible because pricing in the local services industry is so opaque. 

      We hope to publish more posts in the future on these issues.

      • Bert

        Again…. you’re link to the other article is the same as this one.  Completely biased and useless.  Of course local contractors change their prices based off of the customer/job.  But your article(s) are not about that, they are directed at the daily deal industry and not at the local service industry as you claim in your reply to my first post.  If you want to write an article on the local service industry as you claim then do so.  You have boldly listed on your site above that you have over 200,000 local services signed up for your services.  Sounds like a pretty good pool of subjects to do some research. 

    • Blakebattlesr

      not bogus I wash houses and if i did a deal on a house that cost $200 to  wash you can not discounted 50% and give 40% commission. So you show the reg price as $450.

      450
      -225 (50%)
      ——–
      225
      –90 (40% commission
      ——-
      135

      So you knocked $65 bucks off not $225

      PS
      In most cases you only wanted $150 you say $200 because people always want to feel as if they made a good deal.

  • http://twitter.com/rikraff Richard Mulholland

    Interesting article. I always wondered if that in some cases a rate or price for a product or service would be inflated to make up for the discount. My experience with Groupon has been good, but this is an aspect that you should keep an eye on.

  • Shiva

    Yes. I bought 2 restaurant coupons worth $25 each for about $5. That weekend when I used one of the coupons for a dinner for 4, my bill with coupon was more than without (!)

    I did not bother to use the other coupon. Its still with me and the restaurant is closed. I get emails from groupon to cash or exchange it for another restaurant. I don’t dare.

  • Foodie

    It’s even worse for services with variable costs and not fixed costs (ie – the restaurant industry). Using the same example in the comments of $50 for $25, and going with a simple 50/50 split, that gives the restaurant only $12.50 from the $50 sale. Unfortunately, depending on the items purchased, food costs can run anywhere from 25-35% – very typical across the restaurant industry. 25% of $50 is $12.50 – and that’s assuming it’s a 50/50 split, and the restaurant has outstanding food costs. Terrible model. Restaurants lose money on each voucher that comes in the door. They’re praying for the purchased vouchers that don’t get redeemed to try to break even. Take a look at tangotab.com – they’re model is much more beneficial for the restaurant industry.And they feed hungry people each time you reserve an offer. Worth a look.  

  • http://www.sandiegoresortrentals.com TravelDiva

    Interesting food for thought…Groupon and Living Social can be great tools for marketing.  But it’s no secret they target quantity, not necessarily quality.  On one hand, you’re driving traffic to your company that would not have been there before.  On the other hand, Groupon and Living Social have such stringent criteria on the percentage of discount you’re offering (it has to be a SMOKIN deal, ripe to expire SOON!), that I can see how vendors would be pressured to inflate prices. 

    On the other hand, I can see vendors thinking of their services as hotels do – “this inventory is perishable.”  Just because it’s not food on a shelf, doesn’t mean it won’t expire tomorrow.  If you want this promotion to make your phones ring TODAY, you better put something remarkable enough out there to entice buyers to take action – it’s why the Groupon/Living Social models work.  Hotels have a “rack” rate, usually so exorbitant that the only thing it is used for is discounting off of.  For example, the rack rate at a Holiday Inn may be around $250 a night - that’s a lot for a Holiday Inn.  But it’s really the base rate that everything else is loaded from, what’s posted on AAA and in travel brochures, etc.  So a 50% discount on Expedia sounds great at $125, but really that’s around the the going price anyway.  Everybody wins – the rate integrity is protected, the discount draws in the consumer (who is happy with the price), and the hotel has not really “discounted” anything to drive revenue. 

    Perhaps the same is true for these inflated service industry discounts – They have their desired (“rack”) price point (say $150 for 2 hours of cleaning),  It would be great to never have a price objection on the desired $150, but let’s face it, times are tough.  So there’s the price that’s more competitively sellable most of the time (say $80), then there’s the 50% discounted Groupon ($75). 

    In the end, I still always have to ask myself when the enticing Groupons and Living Socials come across (or if I’m at the mall, or Costco, my downfall):  Is it ON sale, or is it FOR sale?  Just because it’s deeply discounted, or has a screaming yellow price tag, doesn’t mean it’s a smokin’ deal.  Educated consumers will still consider the end price, not the percentage off. 

    • Anonymous

      This is really interesting, very insightful. I didn’t realize this about the hotel industry – sounds like it could be very similar.

      Thanks for letting us know – definitely adds an interesting twist to this case study!

  • COMPU10

    Why doesn’t “Thumbtack” have a customer service phone where a Business can call?? Why are emails ignored for days, how does “Thumbtack” expect to reach the height of a businesses such as Angieslist, when all successful businesses are defined by their CUSTOMER service?