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Online group buying—what’s the big deal?

Groupon launched quietly in Chicago in 2008, offering a one-day-only deal for half price pizzas from a local store. Its daily deal model changed the face of online marketing. In just 18 months, thousands of entrepreneurs have jumped on the bandwagon, launching daily deals to millions of bargain-hunting online consumers out for a good time or a cheap buy. The benefit to the consumer is obvious, but what can a small business get out of selling its product or service at a loss?

Why jump on it?

“The beauty of it is that it allows a business that’s never advertised before to hit markets and expand its business with virtually no risk and pretty low cost,” explains Adam Schwab, managing director of DEALS.

Businesses can tap into collective consumer buying power and grow awareness of their business without a big financial outlay, says Patrick Schmidt, managing director of Groupon’s Australian subsidiary Stardeals. “If you don’t sell any vouchers you don’t pay anything to us. There’s no risk.”

Don’t be fooled⎯it’s not no-cost advertising. You will pay commission on deals sold to the host site, and group buying isn’t about delivering profit. “We generally get our merchants to give away their profit on the first visit so they can get the customers in easily,” says Colin Fabig, CEO of Jump On It. “That extra revenue, that give up of profit, is usually wasted in advertising and other mediums. So you’re not giving anything away. You just stop advertising in the Yellow Pages or your local newspaper.”

Schmidt describes the costs involved as a “reallocation of your marketing budget”.

You are paying the host site to take on the costs and labour of promotion, explains Jon Beros, general manager of Scoopon. “We pay for all the email blasts that go out to members and the promotion on Facebook and Twitter.”

The true value of a group buying deal is in the volume of customers and exposure your business receives. “You get huge amounts of people buying the deals in one day because it spreads virally through people’s social networks,” says Dean McEvoy, CEO of Spreets. “When you spend on a group buying site you can guarantee you’ll get customers who will come in, become your advocates and be repeat customers. There’s still no better marketing medium [than word-of-mouth] and I’ll stand by that until I’m blue in the face.”

How do you make it a star deal?

Your ability to turn deal buyers into repeat customers will dictate your success. Schmidt says the responsibility lies with the merchants to prioritise customer service.

“If a restaurant provides great food and great service, even a bargain hunter will come back.” Beros agrees. “You need to make sure they’re treated like a first class customer, not a second class coupon holder.”

Businesses do get a branding benefit, Schwab says. “But the real value is that you get customers through the door, and if you give them a really good kind of service they’ll hopefully come back.” Prioritising customer service is the easiest way to ensure your business gets value out of the deal.

The easiest way to ensure your deal fails? Overestimating your capacity. How many staff do you have answering phones? How quickly can you fit customers in? How many customers can you serve on one day? Beros says Scoopon sits down with the business to work out its capacity. “After a deal finishes, be prepared for everyone to jump on the phone and try to book in. So have plenty of people ready to take all the calls and book people into time slots.”

At Stardeals, Schmidt says its representatives will cap deals to ensure the merchant can cope with the volume of vouchers sold. “We detail the economics, we really calculate the capacity of each merchant because we’re interested in having a long term relationship and not just one great deal.”

Make your deal the best you can offer, or it’s not worth running, Schwab says. “Because the business is our partner in value and they’re the ones we’re working for, we’ll structure a deal that makes sense. We work with the business to make sure it works for them.”

That might mean loss-leading or only breaking even, Beros explains. “We make sure every offer is going to be really enticing to the consumer. For the business, we need to make sure they’ve got enough margin to ensure they’ll be successful.” But with so many sellers in the market, a good price might not be enough.

Schmidt boasts Stardeals has become more of a lifestyle destination than a discount site.

“This isn’t about discounting or bargains,” says McEvoy. “This is really about giving people a reason to try new and interesting things.”

Future deals

It seems there are new group buying sites springing up daily in the Australian market. “Services as a group is one of the biggest industries in the whole of Australia, and this is where services have really found an effective way to get to market,” Fabig says. Group buying has helped fuel demand for luxury services like massage or IPL laser hair removal treatments because it’s made them affordable.

But McEvoy isn’t worried. “All of these extra competitors are just educating people about the market and we’re confident that when they come here and discover us⎯and they will⎯they’ll find we have a better offering than what the others have.” The real competition is from traditional local advertising, he says. “But we’re eating into that space and doing it much better than they are. There’s lots of value to be created here.”

Beros believes the market will sort itself out. “It’s a very low barrier to entry, but there’s not enough space for everybody.” The key players will fight for market share at the top, and the rest will need to diversify or merge to prosper, he predicts.

“There’s 17 or 20 or something stupid now,” Fabig says. “But the smaller ones aren’t getting traction, selling two a day or five a day or something silly.” He predicts it will be a year before the market is saturated. “After that, people will have to innovate. Different companies will specialise in different areas.”

Take it from the customers

“I went with Scoopon because of the way they present the deal. They appreciate the exclusivity of it,” says Pamela Raschella of Shocolate. She said competitor sites had rushed the deal. Raschella uses group buying to promote an experience or launch a new product. The deals have given Shocolate great exposure to new markets and corporate clients. Raschella says the deals are easy to manage, because she knows in advance how much demand to supply. She advises small businesses not to cut corners when servicing the deals, because “it’s your name on the line.”

Alan Cohen of Bankstown Helicoptors said Spreets delivered a whole new customer base. “For us to be exposed to Mr and Mrs Average in any street in any part of Australia is something we would never have been able to afford in print media or in TV. It’s a no-cost option. If people don’t fly, it doesn’t cost you.” Cohen said the deal sold 600 times the volume he’d expected. “It was close to our margins, but the exposure you gain from the advertising is far greater than what you lose.”

Simon Barnes of Milkk studios says Jump On It delivered repeat business and a better sell rate than competitors. The deal was so successful, Barnes had to hire more staff and buy more equipment. “It’s how you handle them when you come in, it’s how you present your salon or your business,” he advises other businesses. “It is an opportunity for you to take up new clients, you’ve just got to manage it correctly.”

Naomi Nobetsu opened Burwood Teppanyaki House in Melbourne just a few months ago, and used Stardeals to attract a “quick boost” in customers. She was overwhelmed with the reaction. “People were so quick to act on it, the bookings were flooding in.” She says next time she’ll have to limit the deal, because “it’s working tremendously, remarkably well.” She offered Stardeals her highest recommendation for small and medium business owners.

Kristen Wagner of Prestige Smile chose DEALS because they weren’t pushy on heavy discounting, and it’s paid off, with nearly 30 percent of voucher holders returning to pay full price. “It’s a tangible result,” he said. “You see it straight away. Other forms of marketing it’s very hard to gauge what effect they have. From a business point of view, it brings in cash flow. It’s allowed me to expand to more shops quicker than I would typically be able to.”

In their own words, why choose..?

DEALS: “We’re not associated with a big media company, we don’t have metrics and profits to report back to head office or a foreign company,” Schwab says. “It gives us a real advantage in working with local businesses that most of our larger foreign-owned competitors don’t have.”

Jump On It/Living Social: With two different platforms, Fabig says he can offer clients “two bites of the cherry”. Living Social also offers a hyper-localised selling platform for small businesses (e.g. deals for Sydney’s Inner West or Melbourne’s CBD). Fabig says both companies have a separate, high quality database. “We’re not the bargain basement guys. We tend to have slightly higher prices and higher value items and because of that we have customers that spend more and are looking to become regular customers.”

Scoopon: Without a rigid structure or flat commission rates, “we treat every supplier as an individual business with different needs, and we negotiate the offer based off the business’ needs,” Beros says. As a spinoff from Catch of the Day, Scoopon has five years’ experience in the daily deal field. “We really understand the space. We have a member base of customers that we’ve built over this period, we haven’t bought databases, we haven’t incentivised people with competitions or dangled iPads in front of them.”

Spreets
: “We’re all about keeping that true core focus of giving people an interesting thing to do, and the others don’t look at it like that,” McEvoy says. Spreets partnered with fashion deal site Brands Exclusive to grow its database. “We sell more than Cudo and Jump On It with less people in our database because we’ve got good quality people that are prepared to spend money.”

Stardeals
: “We are the inventor of the group buying model,” Schmidt says. Stardeals invests a lot of time, money and resources into services for both the merchant and the customer, with 50 people in Sydney working on customer and merchant services. “They’re not in India, not on an island, they’re in Sydney taking calls.” Stardeals also do follow up surveys, so a merchant can get feedback about a customer’s experience and behaviour when redeeming the voucher.

Jennifer Blake

Jennifer Blake

Jennifer Blake is a staff writer for <i>Dynamic Business</i> magazine. Fascinated with the power of media, she's previously worked for Sky News and <i>The Jakarta Globe</i>. In her time off, she's likely cooking up a storm, haunting vintage stores on King St, Newtown or trawling design blogs for things she can't afford.

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