The Pros and Cons of Group Buying

Mar 8, 2011

In November 2008, the concept of group, or collective buying on the Internet experienced a revolutionary takeoff due to the site Groupon.com. It was only a matter of time before other sites emerged, Livingsocial.com being its biggest competitor, and now, there are hundreds of sites offering unbeatable deals.

As a consumer, there’s little risk or reason not to participate. Buy the deal for a fraction of the price, and when ready, redeem it. The only downfall is that they do eventually expire, and some, especially the exercise deals, will go unused. Beyond that, group buying is safe and extremely beneficial to consumers looking to save money, as well as people looking for new things to do and new places to try.

The real risk comes on the business’s side. A business offers a service or a product at a fraction of the price, usually at least more than 50 percent off. For example, “Pay $10.00 and get $20.00 of food” at a local restaurant. The deal is posted on the collective buying website and mass blasted to their enormous email list. Consumers now have a limited amount of time to purchase this deal before it expires. By the end of the deal’s time, “X” amount of people have purchased the deal, and then comes the split with the group buying platform that ran the deal. Many site’s split is as large as 50 percent, so businesses are now giving consumers their product or service at 50 percent off, but only received around 25 percent of the value.

Broken down in this manner, this may not sound like a very good deal for the business, but the upsides are that the business now has a large chuck of cash upfront that may be much needed at this time, as well as the exposure and the goal of generating new business. There are definitely pros to participating in a group buying deal, but many business owners are failing to look at the cons, and ending up with negative, unexpected ramifications. Here is the list of things to consider before participating in a group buying deal:

  • Do the math. Figure out the entire equation of how much your product or service actually costs you and how much you are coming out ahead, even, or under after the split with the company. Make sure you are not coming out too far under.
  • Assess the amount of deals your business can really handle. Each group buying site will allow you to put a cap on the number you want to offer. If you are a small, one-man show, selling 5,000 deals could be impossible to honor before it expires. Businesses have experienced negative backlash on online review sites and lost future customers because coupon buyers were unable to use their deal due in a timely manner because the business was booked solid. Don’t be greedy.
  • Decide which company to partner with. There are literally hundreds of options of which company you can run a group buying deal with. If you are a business that can handle high volume, as well as can handle a larger split, one of the big guys such as Groupon or Livingsocial may be the way to go. Amazon recently ran a nationwide deal for $10.00 for $20.00 of products on its site and sold 1,378,938 vouchers. Amazon can handle this kind of volume, your local hair salon cannot. While these large businesses may look tempting, choosing a local, smaller group buying site has its benefits as well. Working with smaller companies means you’ll have a more personal experience and probably a lot more say in the formatting, copy, and delivery of your deal. For instance, Groupon doesn’t show businesses their coupon copy before it is runs. It may also be a great way to run a lower volume deal. Maybe you’re just looking for a little boost and would be happy with 100 deals sold; the smaller guys are a great place to start. Smaller companies will generally also take a smaller split and leave room to negotiate. If you can’t afford a 50/50 split, working with a local site that could go as low as 70/30 may be a better alternative.

Collective buying is one of the biggest trends in the market right now, especially in an economy where 50-70 percent off deals is much needed and appreciated. But as a business you cannot allow yourself to be sucked in without doing the proper research and consideration. Running a group buying deal could be life changing for your business, but it could also be the final nail in the coffin for a struggling business greedily looking to make some quick cash. Remember these tips when considering a group buying deal and you just might see the positive surge in business that you’ve needed.