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Why should I use Group Buying websites.

November 2008, Andrew Mason started Groupon in Chicago, the first group buying (later known as Social Coupons) convincing his former employer at the time, this is a great business idea. Mr Mason made such a great presentation, enough to raise $1M in seed money, to get going. Last year, Groupon has been reported to be the fastest growing company EVER, reporting over $1Bn in valuation (let me repeat that – 1 BILLION DOLLARS in valuation, after 2 years in operation), representation in 150 countries around the world, turning down a $6Bn offer from Google, and preparing to a $15Bn IPO sometime this year.

Andrew Mason didn’t invent anything new: The power of group buying, to get a substantial discount isn’t new concept. It’s been going on forever.  Mr. Mason has only taken the concept, and built an online platform, to facilitate the concept online.

What can we learn from that?

1.       One thing is for sure: there is a great demand from consumers, which is evident that even at the peak of the GFC (Global Financial Crisis) people were still looking to explore their local area, go out and enjoy life.

2.       People always will take advantage of a great value offer.

3.       Most businesses can really use a few more customers coming through their doors.

4.       The old ways of advertising are less and less effective, so business owners are looking to get exposure (i.e. advertise) but less willing to take the risk up front. What do I mean by that? The appealing Groupon concept is that the advertising is performance-based exercise. No sale – no money. I’ll explain how this is working, later on.

To understand this phenomenon, and how BIG this is getting, let just say there are hundreds of these sites sprouting like mushrooms after the rain, all over the world. Groupon, as the first to market and biggest player, is now boasting over 35 million members worldwide*, and growing. The first one to grab the Australian market is Ouffer.com, which started in February 2010, by two American guys, Josh David and Anton Bernstein. Groupon have saved consumers over $1.2Bn worldwide, according to their website, selling nearly 30,000,000 deals! In Australia alone, Ouffer.com has saved consumers nearly $10,000,000 in under a year!

Many people saw the huge potential of the Group Buying market, and clones popped up everywhere. They are (of course!) all different, and have their own POD (Point Of Difference), such as their pricing structure (how much commission they get from the offers), their reach (how many subscribers they have), and some even will go the extra mile, and will distribute brochures around the business area (hard copies! On paper!), or advertise their deals/offers on TV and radio). There are pros and cons, when considering the integration of the old media (print, radio and TV) with the new, but this is not for this discussion.

Types of businesses benefiting from these services:

Let me start by stressing: this is NOT for every business. To be featured successfully on these sites, a business must be able to give a substantial discount, typically over 50%. This already means that the business has to have enough margin in their offering, not to lose money on the deal.

So how do I know this is for my business?

  • If you’re selling a product, which you have too much excess inventory, and you can’t get rid of it any other way, but forced to massively discount it, as it costs you more to keep the stock – this is a great option for you.
  • If you’re selling a service, and you have high fixed overheads, but low variable expenses per service rendered – this is a great option for you.

Examples:

  • If you are a manufacturer, with unused production capacity, you can choose a product you can produce in the “dead hours” and maximise your capacity.
  • If you have a tourist service such as a cruise around the harbour. Any unfilled capacity you do not sell is gone once the ship has sailed. You could sell this unfilled capacity during off-season through one of these sites.
  • If you selling a beauty, health or wellness service (Hair, nails, massage, chiropractor, physiotherapy, dentistry, optometry, pet grooming, etc…), and you have staff who are not working at full capacity, or have empty seats during the day.
  • Transport services – Limos, water taxis, seaplanes – maintenance and staff costs are high – might as well get them working!
  • Restaurants – again, fixed costs are high, and the tables aren’t full. Fill ‘em! Nothing’s more enticing to by passers, than a full restaurant (with a queue outside!).
  • Any other ideas??

How do I make the most of group buying sites?

Let’s look at this “discount” issue from a different angle. No business likes to discount their services! There must be some compelling reasons to do so. If we understand that this is not only a discount, but a customer acquisition exercise, we’ll have a completely different view of giving a discount.

Repeat Customers: First, the product/service sold isn’t a “one-off”. You’d need to provide a positive experience, so these newly acquired customers will come back for more (at full price).

Referrals: There is no better form of advertising than word of mouth. Giving your new customers something to talk about, will bring their friends and family to your business.

Up Selling opportunity: Selling one discounted product /service, doesn’t mean you have to discount everything! Once you have a customer at your restaurant for a discounted meal, you could still offer
(and they will take it!) some drinks and/or desserts, can’t you?
Selling teeth whitening gives the dentist an opportunity to offer some fillings at the same time.

Cost effective advertising: all other advertising channels (print, TV, radio, banner ads, billboards, Yellow Pages, etc.) will require an initial large investment, which will include the production of the campaign (copy writing, graphic design, filming, recording, printing, etc.) and the fees of the agency. When using the group buying sites, you won’t be asked to pay any of the production costs. In fact, everything is done at the company’s expense,  and their fees are taken as a commission of the deal. This means – your business is getting exposed to 10’s or 100’s of thousands of potential customers, which some will take advantage of the offer immediately (normally within 24hours of the feature). If they buy, and the deal is ON (subject to a minimum), then you, as the business owners will pay a percentage of those sold items. No deal – no pay!

Attracting hard-to-reach demographics: Groupon has put together some statistical data, regarding their members. I would take a bit of a risk here, and assume that most of these group buying sites will have a similar demographic breakdown:

  • 77% of users are women.
  • 68% are young (18-34)
  • 95% are well educated (with more than high school diploma)
  • 70% have money! (Not bargain hunters, earning in excess of $50k per annum)

If we know these demographics, and they are aligned with our business’ desired demographics – then it’s another reason to feature on these sites.

Featuring on these sites does these main things:

1.       Exposing your business and offering to a large, clever, wealthy, young group of people (LARGE group of people), who are looking to explore their cities, and find new & exciting things to do.

2.       Reducing those people’s risk (monetary risk) when trying out a new service.

3.       Reducing the business owner’s risk of investing heavily in marketing/advertising channels, which may or may not work.

Who shouldn’t feature on these sites?

There is also a risk, following such massive exposure. If you think you can’t handle such a surge in customer flow, you better be honest about it. If you have a great offer, and too many people take advantage of it, it may actually harm your business. Before making a decision to advertise your deal, you’d need to have an understanding of the consequences.

Last year a Brazilian Restaurant in Sydney, Australia, has sold over 3,500 meals via Ouffer.com.  Obviously booking are essential, and there is an expiry date on the offer, but this means this restaurant is guaranteed to be full (100 people) for a more than a month (5 weeks), after 24 hour promotion.

To handle that sort of exposure, some companies will opt to cap the number of deals sold, to a reasonable amount.

Is your business suitable? Have you had some experience with group-buying companies? How did you find it?

 

 

 

*Source – Wikipedia http://en.wikipedia.org/wiki/Groupon

Disclaimer: The author has a commercial interest in ouffer.com in Australia.

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  • http://dealpinch.com Lucy

    “To understand this phenomenon, and how BIG this is getting, let just say there are hundreds of these sites sprouting like mushrooms after the rain, all over the world.”

    There is huge growth in the number of these sites in Australia, we run am Australian/NZ group buying site aggregator, Deal Pinch and are adding new sites every week. In the last 6 weeks I have been approached by 14 new group buying site providers on the countdown to launch wanting their deals listed!

    With Deal Pinch we aim to make it easier for consumers to track all the deals in one place and we also offer a daily email service where you can select the categories of deals you want to hear about e.g Dining & Drinking, Health & Fitness and NO Hair & Beauty!

    http://dealpinch.com/city/sydney

    Those wanting to read about the experience of a merchant running a group buying deal and the decision making process involved should check out this post also:

    http://anthillonline.com/what-i-learnt-selling-panties-on-spreets-how-to-sell-through-group-buying-sites-in-7-steps/

    • http://www.razchorev.com Raz Chorev

      Lucy

      Thanks for your comment. We have seen a huge growth, and the fact that sites like yours are sprouting as well, just makes me think that this trend is not going away any time soon.
      One concern I have though:
      Ouffer.com have just announced a $10,000,000 saving to Australian consumers. I wonder what would be the implication on the Australian (and obviously global) economy.
      Any ideas?

      • http://dealpinch.com Lucy

        I think this gets to the “price discrimination” and “awareness” point in the Harvard article.

        ie Price Discrimination:
        “Through the deal the merchant may be able to hook in a new set of customers that are much more price sensitive and wouldn’t have bought it otherwise”

        and

        Awareness:
        “Group buying deals can alert a large and new group of customers that the merchant exists”

        $10,000,000 has been saved, but how much has been spent? And would this have been so without the deal offering an accessible price and wide profile?

  • http://www.spankyourbank.com.au Spank Your Bank

    Very Interesting read – thanks for posting.

    One thing we heard which we were interested in confirming was that Group Buying Deals make their main profits from unclaimed deals. Do you know if this is true?

    Cheers,
    The Team at Spank Your Bank

  • kareen

    Short and informative article. Appreciate it!

    Do you suppose such ‘social coupon’ sites could be a fad?

    What’s their business model like anyway?

    I was just wondering if there could be terrible implications for merchants. Would consumers patronise only when there are such deals offered and thereby decreasing customer loyalty?

    • http://www.razchorev.com Raz Chorev

      Kareen, you’re asking great questions! I don’t know if the Social Coupons sites are a fad, but what I do know that there are a lot of them sprouting around, become more and more niche oriented, and many deal aggregation sites are popping up, so obviously there is demand for this kind of service.
      There could be terrible implications on merchants, who don’t understand the value of these sites. When these merchants enjoy a boost in cash flow, they will try and put offers on multiple deal sites, but suffer great losses at the same time. Merchants who don’t provide the same level of service due to sudden increase in traffic, and lacking capacity to handle it, will significantly damage their reputation. Moreover, some people will only shop based on these deals, which will have morbid effect on customer loyalty, but on the retail industry as a whole.
      Regarding business model – it changes slightly from company to company, but essentially these companies accumulates massive database of potential buyers, then approach potential sellers, offering free advertising to their database. They only charge success fee, once the deal goes live. Then, the company will pay a portion of the revenue to the merchant, and keep a portion (20-50%) and pay “on redemption”. That’s the model, in a nut shell.

  • kareen

    Hi Raz,

    Thank you for your prompt replies on Twitter :)
    I feel appreciated. lol

    Anyways, upon further readings, there were obviously ambivalent views as it would be with any other phenomena.

    I chanced upon this blog: http://tommytoy.typepad.com/tommy-toy-pbt-consultin/retailing/
    (more on retailing-ecommerce)
    and found it a very intriguing read indeed. You can have a look-see.

    Having read the post titled: AN UNABASHED ANALYSIS WHY GROUPON’S BUSINESS MODEL IS UNSUSTAINABLE, AND WHY IT IS ON THE VERGE OF FINANCIAL COLLAPSE

    I find myself (being a skeptic as I am) more and more averse to thinking social coupon sites would bring in more revenue (long term) for my company. Of course, as a consumer, I’m most definitely thrilled to get great discounts!

    • http://www.razchorev.com Raz Chorev

      Weather the Groupon business model is sustainable or not, only time will tell. As long as there is demand for this kind of service, from consumers & merchants, these businesses should flourish. (obviously they also need to be run properly).

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