Economics of a Daily Deal

The future of the so-called ‘daily deals’ space emerged in a significant way today.

This morning Groupon published a daily deal for $39 toward $100 in-flight credit on Virgin America for flights to Chicago from San Francisco or Los Angeles. That flight needed to be taken before March. At first blush, the Hattery team was pretty excited — a lot of us are from Chicago. And given going to Chicago between now and March isn’t really ideal weather, it seems like a good way for Virgin to fill empty seats. Win-win.

But the deal was just for flight credit, not for any specific fare. So immediately, as the deal was purchased, buyers began booking flights to Chicago. And as every individual booked (or perhaps as blocks of bookings were made, depending on how Virgin handles demand pricing) the ticket price went up. And before you knew it, Virgin had helped fill a lot of empty seats at a relatively low cost to them. In this case Groupon provided some marketing power to Virgin, but more importantly, helped Virgin with a very real supply problem.

Which means that ultimately, Groupon found a customer for their client’s product — not for a small business client that could barely afford to offer the deal (and only did so in the name of marketing and customer acquisition), but rather a company looking to optimize its operations. I’d like to imagine this is the future of the deals space. In a lot of ways, it is a game for users: get there first to get the best deal; and a service to providers: get access to users who will help fill underutilized inventory and capacity. I believe this is part of the future for this space.

Of course the users who lose are those who bought the deal at the end of the day. They could probably have taken a cheaper flight to enjoy a beautiful July weekend in the Windy City.

UPDATE: It was pointed out to me that depending on how much demand there ends up being for flights between now and March from non-Groupon coupon holders, Virgin could stand to actually profit from this deal via demand pricing. Which would make the strongest argument for why daily deals should move out of the marketing-cost category.
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