Understanding the Group-Buying Reality vs. Perception

Groupon. Wag Jag. Team Buy. Living Social. Deal Find. These are just some of the many startups taking advantage of the biggest shifts in e-commerce this century. Some will call it a Group-Buying Boom. Others will claim it’s one of the most significant shifts in e-commerce since paypal. The fact remains, whatever it is you call it, right now in 2011 it has quickly changed the landscape for businesses and consumers everywhere.

It’s easy to define how these sites work. Essentially, they act as a distribution channel for businesses looking to have consumers purchase their products and services at deep discounts. These companies are able to offer these deep discounts because of the volume of sales per deal. It’s been also referred to as collective buying, meaning that if X number of people buy Brand ABC’s discount then the deal is activated – If not enough people buy it (rarely happens) the deal doesn’t take place. If you’re still unsure about how these deals work I suggest checking out this article from Wikipedia.

Today we’re going to dive into the perceptions and reality of Group Buying and how it impacts both consumers and small businesses alike. We will also discuss how the issues with this phenomenon can be resolved and how it can continue to strive as a positive business model that benefits its share holders and vendors/partners alike. Let’s get into it shall we?

The Group Buying Perception & Reality

The Consumers Perception

It’s been a couple of months since I bought my first coupon using a Group-Buying site. The first site I ever used was TeamBuy as it penetrated the market here in Halifax way before the likes of Groupon and WagJag. Since then, I recieve roughly 5 emails a day of daily deals and discounts from all over the Province. Many would immediately jump to say that these sites are an amazing thing for consumers and that the more the merrier! However, I have a different perspective. I believe that within the next two years we will see this boom could have a negative impact on many consumers. Why you ask?

  1. Coupon Addicts Anonymous: As the Group-Buying concept becomes more and more mainstream the number of consumers joining just for a deal will skyrocket. Meaning the number of bargain-hunters and pro-couponers subscribing to these sites will go through the roof. These customers often have (1) No interest in a repeat visit  and (2) No interest in sharing their experience online through Yelp or a Blog. The latter isn’t as likely for most customers but if you’re not going to come back even if the business blows your mind, give them something!
  2. Coupon Addicts Stay Up Late for their Fix: More and more businesses are putting a cap on how many deals they are willing to sell using Groupon. These caps are to ensure that the businesses aren’t losing TOO much money on the deals and that they can handle the response. With an increase in bargain hunters we will quickly see these maximums being met within a couple hours of the daily deal hitting your inbox. The more that subscribe, the faster the deal will sell.
  3. Frustrated Businesses: As businesses start to recognize that their discounts are being purchased more and more by nothing but Bargain Hunters they will be less likely to offer deals on these sites. As more and more businesses see these group buying sites as a waste – The less quality deals we will receive in our inboxes.

  • The RESULT: Quality businesses stop offering quality discounts and the mainstream uptake drives quality discounts being purchased too quickly by the bargain hunters and coupon addicts for quality customers to get their hands on.

How can Group Buying companies stop this from happening? Well, the big guys are screwed and don’t really have any choices here. They could introduce some sort of tracking mechanism that allows them to track whether or not certain subscribers are bargain hunters and not looking to try and support local businesses. That would be in the perfect world but they will probably continue the way they are going. So I look to the smaller companies… The little guys. The start ups.

How to fix this mess

I think they can fix this problem by ensuring that they are attracting customers of value to the partners they are working with and not just coupon addicts. They could do this by adding a layer of exclusivity, layering on an increase in prices or by running extensive customer research on every subscriber (might be a bit costly). Either way, there are ways to fix this issue and ensure that the partners and vendors are not feeling ripped off and not losing valuable dollars.

An additional opportunity to ensure that customers aren’t losing out on a great concept is by ensuring that it’s new customers only. When a restaurant deal comes out and people who are already regulars buy it, the business is losing money as that person would have come without the deal. This also means the business misses out on an opportunity to win the heart of a new customer because an existing customer made the purchase. It’s a cyclical effect that could quickly ruin this for the consumers.

If you’re someone who can hold yourself to a certain set of morals and believe in the Group-Buying model, I’d take a look at Rakesh Agrawal‘s post on Daily deals and personal social responsibility. Some of his personal policies for Group Buying include:

  1. I will never use one at a place where I’m already a regular.
  2. I won’t buy a deal from a business that I never intend to visit again just to get the deal.
  3. I go in with the expectation that I will come back.

The Businesses Perception

The one thing I hear time and time again from small businesses using Group-Buying sites is their belief that using this tool they will generate repeat business. They proclaim, Groupon just has to get them here – We’ll do the rest. Now, this mentality is great and I can understand the confidence of these businesses in thinking that they can generate repeat business after visit #1. That said, the reality of it is, many of these customers are (1) coupon addicts with no intent of returning or (2) existing customers paying less than what they typically would have.

A few other things about Group Buying that businesses don’t necessarily get are the following:

  1. Not Everyone is Happy: I’ve spoken with about 20 waiters and waitresses who work for businesses that have used Group Buying sites and they hate them. Well, they hate them when they are working anyways. Why? Well, because the bargain hunter and coupon addicts aren’t paying tips! But that’s not where the hostility within the business ends… Many existing customers have turned their back on businesses after having their local treasures filled with Coupon Addicts!
  2. Discount with Smarts: Too many businesses have cried and complained that the likes of Groupon and TeamBuy ripped them off. At the end of the day, you’re a business owner who will be met with risks and you will either take them or not. If you decide to discount at 80% then that’s your choice. If you decide to discount at 40% then that’s your choice as well. Depending on whether or not you’re looking for quality or simply foot-traffic this needs to be addressed accordingly.
  3. Immediate Cashflow – Long Term Stress: I’ve heard a lot of horror stories and witnessed one or two on my own of businesses not being able to manage the uptake of a Group Buying deal. Initially, the business owner is extremely excited because they see a cheque in the mail but that excitement soon dwindles when things get out of control. In many cases, business have been (1) unable to keep up with demand (2) become upset when they see receipts for $1.25 and (3) unable to recognize opportunities to turn this stress into an opportunity.

While I think the larger Group Buying sites are in a tough spot as they are slowly becoming the Wal-mart of Startups there is still an opportunity for small businesses to use these sites effectively. Before agreeing to sign up for a Group Buying program the small businesses need to ask themselves a series of questions and LEGITIMATELY drop the ego and answer them responsibly. It’s not about using the sites just because they are cool, it’s about using them because they provide (1) Amazing Marketing and (2) An opportunity to increase sales. As David Ogilvy once said, We Sell or Else!

I Love Group-Buying!

I should be clear that this post isn’t an anti-group buying post. I love group buying and think it’s something that can really be used effectively by small and medium sized businesses who understand what they are getting into.

Look in the Mirror

One perception many businesses have is the belief that  using a Group buying website will devalue their brand. Now, while this statement most certainly holds validity in certain cases, many small businesses need to look in the mirror. This again is perception vs. reality. Your perception of your brand isn’t aligned with reality and as a result you’re missing out on a great opportunity to generate business to improve the perception of your brand. That is, if you’re positioning yourself as a 4 Star Restaurant but have a 2 Star Reputation, running a Group buying discount could drive customers into your seats where you can show them why you really are worth 4 stars.

So what do you think? Do you think Group Buying sites can be good for businesses over the long term? Have you had a solid experience working with Groupon, WagJag or TeamBuy? I’d love to hear from you…

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