The Coming Crash of Group Buying…Smells Like 1999

If you were working for a living at the end of the last century (pre 2000) you may have a sense of deja vu.

All those dot.con businesses stealing money from investors with hopelessly inflated business models that were never going to pay for themselves. Well the same whiff is in the air – it smells like 1999, just before the massive tech-stock meltdown.

That’s because we have the explosive growth in easily replicated commodity businesses – the so-called group buying businesses. And their business model is flawed, their customers (the small businesses) are unhappy and increasingly the final customer (the consumer) is also unhappy.

But don’t take my word for it – check out these articles sent to me by a couple of colleagues from the UK and Australia – Michael Rhodes and John Hancock. Once again commonsense is warning the world, but is anyone listening…just like 1999?

Why you shouldn’t believe the theory behind Groupon’s business model:
http://tinyurl.com/bqbgo4e

Why Groupon is poised for collapse:
http://tinyurl.com/83c8vcx

Like most things on the internet, group buying is not new. It’s just an old habit executed with new technology. For decades we have been able to buy discount coupons in bulk via the Entertainment books and their various competitors.

These are group buying services that supply all sorts of discounts at various retailers in a book. The books are usually sold by fundrasiers as a way of raising funds and many of us have owned one at some stage in our life, heading out to a local restaurant with friends, coupons in purses and plonk in hand.

For my sins, I was once the owner of a family supermarket in suburban Sydney. Unlike most packaged goods marketers, I’ve packed shelves, operated a cash register, packed customer’s bags and carried them to their car, as well as dealt with the ruthless wholesalers who supplied the groceries in our branded retail group. So I have some knowledge about human behaviour.

Every Wednesday and Thursday our metropolitan newspapers were filled with supermarket advertisements promoting loss leaders. These were high turnover items, usually staple foods such as butter, margarine, jams, tinned food, etc. The principle was simple; offer these high-demand products at cost or below cost, to attract customers to your store in the hope that those customers would then buy other products with better profit margins, while they shopped.

These loss-leaders were often only available in limited supply e.g. “limit 4 tubs of margarine per customer”. While the technique certainly shifted lots of loss leader products amongst regular customers, it also attracted another group of buyers.

These were the people who only bought the loss leaders and drove from shop to shop to stock up each week on the items that were on sale. Not the best way to manage one’s diet, but it saved money. These were not loyal customers and they never spent money on items that weren’t for sale.

Many of these are the same people taking up the group buying offers. These are people who are buying a sale item. They are not looking to become regular customers. And many of them are taking up the cheap milk or petrol discounts now being offered as the loss leader by the two major supermarkets.

We’ve recently mystery shopped over 20 different group buying deals and in most cases have successfully redeemed the offers. Though a couple the stores had signs stating they no longer honoured group buying coupons. In one restaurant, despite advising when we booked that we were using a group buying coupon, we were ostracised for having the temerity to use the coupon.

There are a few interesting characteristics about the stores that offered the group buying deals. Most were small businesses who were not necessarily savvy marketers. They had been sold a scam that would allegedly get them loads of valuable new customers through the magic of “the internet”.

Only one in over twenty stores asked for our contact details – and that was because she was a hairdresser and it was her habit to get your details so she could record your next booking before you left the salon.

None of the stores collect payment for providing the service until they redeem the coupons returned by the group buying customers. So they have to fund the sale until the group buying company redeems their funds. Any coupons that are not redeemed stay with the group buying company, they don’t go to the retalier.

The retailers cannot get from the group buying company, the database of people who buy the coupons for the deals. That’s because if they did get the list of customers, then they could contact them directly and not need to use the group buying company again. Although they could just ask the customer for their details when they redeem their coupon.

Many small businesses have been unprepared for the type of buyers who take up these offers. And this has caused significant backlash amongst the customers. Interestingly most of the small businesses we spoke to will not be using the service again. As one retailer said “I had people driving 40 kilometers across town just to get a two-for-one meal. I’ll never see them again and I never want to. They were not the sort of customer we want in our business.”

Of course, the business owners could easily have done some maths to determine whether or not a group buying deal would pay for itself. All they had to do was 101 marketing maths – how much do I invest to gain a customer and how much do I invest to keep a customer? Then work out the cost to convert a group buying “customer” into a profitable customer.

But hey, it was a new idea and it’s on the internet and investors are pouring gazillions of dollars into it, so it must be good.

Like I said “smells like 1999″.

This blog was originally posted by Malcolm in his blogsite, The Malcolm Auld Blog. What are your thoughts on whether Group Buying is here to stay, we’d love to hear it?

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The Next Step in Group Buying: The Merchant’s Guide Launch

By ADMA

Group buying is an exciting channel for both businesses selling products and services, and consumers buying at a significant discount. In the past two years however, there has been an overcrowding in the market that has led many consumers with the feeling of being overwhelmed by emails and underwhelmed by deals.

The same thing, it seems, has happened to the group-buying industry as a whole. After the initial rush of both brands and consumers to jump onboard the group-buying bandwagon, the novelty has subsided and both parties are realising that they now have to put real measures in place to make this work.

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Multi-national group buying sites fuel industry growth

by SAM YIP

A new market report published today by Telsyte shows that multi-national group buying sites are driving strong industry growth with LivingSocial and Groupon growing 75% and 118% in the quarter, respectively. The group buying market grew from $123.9 million in Q2 2011 to $158.5 million in Q3 2011 representing a quarter-on-quarter increase of 28%.

“The growth of the global group buying players in Australia this quarter proves that the money spent on strong local marketing has not just captured the attention of Australians, but also converted them to a sale,” Telsyte Senior Research Manager, Sam Yip, says.

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Group Buying looks to Drive Loyalty

by MELINA ROHAN

A Telsyte, Australian Online Group Buying Merchant Study 2011 has estimated that the
group buying phenomenon is growing at an amazing rate with the industry estimated to be worth about $400m by the end of the year and growing 72% every quarter. The same study revealed that 94% of merchants are satisfied with their group buying promotions and 85% of merchants were looking at another group
buying campaign.

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How bacon is clogging the arteries of your email inbox

BY PHIL SMITH

A while back, in preparation for a facilitation role at ad:tech on an email panel, I read an article on Mashable entitled “Why Your Email Inbox is Bringing Home the Bacon”.

The purpose of my research was to look at some areas for the email marketing companies/providers on the panel
to discuss that may be impacting marketers use of the channel in their communication activities.

The essence of the Mashable article was that Spam isn’t wanted or liked yet Bacon (Bacn) – email that you have
legitimately subscribed to: Groupon Deals; Facebook updates; LinkedIn updates; Google notifications and so on – is something people love.

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The Group Buying Phenomenon

What works, what doesn’t and what to watch out for! by MELINA ROHAN

As ADMA has been asked to assist with the Group Buying Code of Conduct, I thought we might continue the theme to further explore what works
in group buying promotions and what doesn’t.

Data Scientist, Paul Butler recently deconstructed the group buying phenomenon in an article in the Harvard Business Review. Continue reading

Price Discrimination

Making the most of price discrimination through data driven marketing by Billy Tucker

Businesses have been discriminatory since the dawn of time. Recognising that not all customers are equal is essential and provides the key to maximising the effects of supply and demand.

Making the best use of discriminatory pricing means that you need to identify the price sensitivity of each customer group and target them with an appropriate incentive. For example, how willing are they to do work or take risk in exchange for a discount.

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