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Power to the people or passing fad? Forecasting trends in group buying
January 5, 2011, Wednesday
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IT took a lot for Rob Solomon to leave sunny Silicon Valley for wintry Chicago, but it's a change he was happy to make. The e-commerce veteran moved to the Midwest to become president of group buying site Groupon, spotting the company's potential to be the next eBay. Named by Forbes magazine as the fastest-growing company in web history, Groupon leverages consumers' penchant for online bargain hunting with the power of social networking to build a business with skyrocketing sales.
Groupon - from the words "group" and "coupon" - negotiates deeply discounted deals with mainly small businesses and alerts its legion of e-mail subscribers to the offer, such as half off on a Swedish massage. The deal is triggered when a minimum number of users buys the voucher, and consumers are rewarded if their friends purchase as well. The discounts run from around 50 percent to more than 90 percent, but the deal must be purchased within a limited time, usually 24 hours.
To entice buyers, Groupon's writers craft a zany ad in keeping with the Internet zeitgeist.
The deals and the drama have propelled Groupon into the e-commerce stratosphere.
Founded in 2008, Groupon now reaches 25 million subscribers in 29 countries.
But are group buying sites just a passing fancy that will end as quickly as today's 70 percent off deal?
"I don't think it's just a fad," says Kartik Hosanagar, a professor of operations and information management at Wharton, noting that social commerce sites tap into the needs of both small businesses and budget-conscious consumers.
Old idea
The deep discounts and social nature of the deals appeal to the Internet-savvy, while local shops get mass exposure without the upfront marketing costs of newspaper ads or TV and radio spots.
Groupon markets the deal and shares the sales with the business. "Customer acquisition costs for small businesses are very high," Hosanagar adds.
Group buying sites are not new, but previous incarnations failed to gain much traction with consumers.
What makes group buying sites click today? For one thing, consumers are more comfortable with socializing and sharing information online, as the popularity of Facebook, LinkedIn and Twitter attest.
The new sites also offer deals that usually cannot be found elsewhere on the Internet, such as 45 percent off cupcakes at the corner bakery. Another difference: Groupon and similar sites reveal the amount of the discount up front (although it's only triggered if enough people sign on to buy the item.)
Such tweaks to the business model make the latest iteration of group buying sites more likely to last, experts say.
That doesn't mean there won't be an industry shakeout.
To rise above its rivals, a group buying site needs to have a good brand name and reputation.
Small businesses will naturally want to partner with the site that has the biggest following; in turn, the greater diversity of deals will attract even more consumers. Meanwhile, the remaining sites will have to fight harder to get market share.
Justify discounts
As the dynamics of the market change, observers expect small businesses to begin crafting more profitable deals for themselves - possibly at the peril of profits for partnering social commerce sites.
According to Solomon, Groupon encourages small businesses to slash prices steeply to make the deal compelling enough that consumers will be willing to try something new.
"The traditional methods of acquiring customers through newspaper ads or The Yellow Pages have failed pretty miserably over the last 10 years," he said.
But what happens once masses of consumers are trained to expect big discounts? If they don't find a compelling deal at one site, they will hop to the next one. The result is erosion in profitability for businesses in an area as bargain-hunters shift from shop to shop or deal to deal.
For a small business to justify a deep discount on existing products or services, the management has to believe that the product or service offered is better than what the market currently believes.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
Groupon - from the words "group" and "coupon" - negotiates deeply discounted deals with mainly small businesses and alerts its legion of e-mail subscribers to the offer, such as half off on a Swedish massage. The deal is triggered when a minimum number of users buys the voucher, and consumers are rewarded if their friends purchase as well. The discounts run from around 50 percent to more than 90 percent, but the deal must be purchased within a limited time, usually 24 hours.
To entice buyers, Groupon's writers craft a zany ad in keeping with the Internet zeitgeist.
The deals and the drama have propelled Groupon into the e-commerce stratosphere.
Founded in 2008, Groupon now reaches 25 million subscribers in 29 countries.
But are group buying sites just a passing fancy that will end as quickly as today's 70 percent off deal?
"I don't think it's just a fad," says Kartik Hosanagar, a professor of operations and information management at Wharton, noting that social commerce sites tap into the needs of both small businesses and budget-conscious consumers.
Old idea
The deep discounts and social nature of the deals appeal to the Internet-savvy, while local shops get mass exposure without the upfront marketing costs of newspaper ads or TV and radio spots.
Groupon markets the deal and shares the sales with the business. "Customer acquisition costs for small businesses are very high," Hosanagar adds.
Group buying sites are not new, but previous incarnations failed to gain much traction with consumers.
What makes group buying sites click today? For one thing, consumers are more comfortable with socializing and sharing information online, as the popularity of Facebook, LinkedIn and Twitter attest.
The new sites also offer deals that usually cannot be found elsewhere on the Internet, such as 45 percent off cupcakes at the corner bakery. Another difference: Groupon and similar sites reveal the amount of the discount up front (although it's only triggered if enough people sign on to buy the item.)
Such tweaks to the business model make the latest iteration of group buying sites more likely to last, experts say.
That doesn't mean there won't be an industry shakeout.
To rise above its rivals, a group buying site needs to have a good brand name and reputation.
Small businesses will naturally want to partner with the site that has the biggest following; in turn, the greater diversity of deals will attract even more consumers. Meanwhile, the remaining sites will have to fight harder to get market share.
Justify discounts
As the dynamics of the market change, observers expect small businesses to begin crafting more profitable deals for themselves - possibly at the peril of profits for partnering social commerce sites.
According to Solomon, Groupon encourages small businesses to slash prices steeply to make the deal compelling enough that consumers will be willing to try something new.
"The traditional methods of acquiring customers through newspaper ads or The Yellow Pages have failed pretty miserably over the last 10 years," he said.
But what happens once masses of consumers are trained to expect big discounts? If they don't find a compelling deal at one site, they will hop to the next one. The result is erosion in profitability for businesses in an area as bargain-hunters shift from shop to shop or deal to deal.
For a small business to justify a deep discount on existing products or services, the management has to believe that the product or service offered is better than what the market currently believes.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
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