A few thoughts on group buying

4 Nov 2010 by Randall Helms, 1 Comment »

Two weeks ago, Patricio Robles of Econsultancy posted an article entitled “Group buying has jumped the shark”, which I’ve been meaning to blog about ever since, particularly since I had an interesting discussion on the topic via Twitter with @andrewjdavison of Ziggurat Brands.

Anyways, before I go on, it’s worth excerpting the crux of Robles’ argument on the potential of group buying services like Groupon:

Unfortunately, the talk about Groupon is crazy and no matter how much one likes the group buying model, it’s safe to say that group buying has jumped the shark.

What everyone seems to be forgetting: Groupon and its competitors don’t really sell anything. They serve as agents for local businesses. Those local businesses not only discount their products and services significantly to get members of Groupon’s audience through the doors, they pay a hefty commission for the privilege …

Group buying’s Achilles heel: the growing realization that group buying sites aren’t delivering a vast audience of high-value consumers who are interested in patronizing the businesses they discover through their group buying purchases. Groupon’s own data confirms this. According to The Wall Street Journal, Groupon’s research found that only 22% of Groupon buyers go back to the businesses from which they purchased a Groupon …

And there’s good reason to believe that the ability of group buying sites to deliver loyal customers is constantly declining. After all, group buying is sprouting up everywhere. From startups receiving millions of dollars in funding to AOL to newspapers, everybody is jumping on the bandwagon. Make no mistake about it: this will have a viral, cannibalizing effect on whatever ROI these sites might ever hope to generate for the businesses that use them. After all, if you’re a consumer, another great deal is always around the corner, so why ever pay full price?

This is a very interesting article, but I don’t quite agree with the main thrust of it. It may well be the case that Groupon’s potential is being over-hyped, but at the same time I have my doubts about the key element of Mr Robles argument, which is that Groupon will end up being hammered by intense competition in this sector, for two reasons:

(1) I doubt that consumers will want to join many group buying schemes
(2) I doubt that retailers will want to set up their own group buying operations

The first point is fairly self-evident, but I have my suspicions as to how many group buying sites customers will want to join, because, more than other areas of online commerce, the effectiveness of a group buying operation is tied to the size of the potential ‘group’.

Without enough people to redeem a group offer, it is irrelevant what kind of offers a site will make.

Group buying is a great example of network effects in action – the larger the network of users, the more valuable the service. Therefore, this is an area of e-commerce with a tremendous built-in advantage for first movers; in this case, Groupon.

Think of it this way: if you as an individual were looking to start using a group buying service, why would you join an upstart network where you would be unlikely to be able to redeem your offer over one with a much more established userbase?

There aren’t many good reasons why you should.

Now, I certainly expect there to be a flood of competitors into this area, because it is an attractive business model, but I think that it will quickly shake out to be dominated by a few major players, just as social networking has increasingly come to be dominated by a few key sites.

For retailers, as well, I doubt that many will want to set up their own group buying operations.

If you work for a retail brand and you want to set up an in-house group buying operation, what would you have to do to make it work?

  1. Offer new deals regularly
  2. Make sure those deals are very attractive
  3. Attract enough customers to make it worthwhile

The problem, as I see it, is that I think that there are very few retail brands that would really benefit from running their own group buying system.

Let’s say you are Marks & Spencer and you set up a group buying operation that manages to do all three of these things; by being ‘successful’ in this, will you not have conditioned your customers to expect to never pay full price? You will be cannibalizing your bottom line, and, except for those few retail brands that are monomaniacally focused on price, this is a suicidal strategy.

However, if you want to use group buying services as a means of promoting your business, a better option is to work with a third party provider (like Groupon), because (1) you don’t have to do it that often to maintain consumer interest, and (2) you won’t be cutting into your own bottom line too much. Certainly, there is still the risk of training consumers to see your brand as ‘cut-price’, but those risks would be massively magnified by establishing your own in-house group buying operation.

I do feel that the current level of deals that are offered are probably unsustainable. 60-70% discounts might work if they guaranteed repeat business and that consumers would then buy other items at full-price, but since that does not seem to be the case (at least judging from the data that Mr. Robles references in his post) it is likely that the group buying discount will have to fall. I believe that this would probably happen anyways, since part of the reason for such eye-catching deals is the need to get people accustomed to the concept of group-buying – once it becomes more familiar and more integrated into everyday consumer behaviour, there is less need to offer such outlandish deals.

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  1. […] This post was mentioned on Twitter by Social Media Tips and Randall Helms, Randall Helms. Randall Helms said: new #socialmedia post on @Groupon – http://bit.ly/cUCNSG […]

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