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The More, the Merrier: The Power of Group-Buying Websites

Written by Mint.com
Published Nov 8, 2010
5 min read
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(photo: Groupon)

If you’re one of the millions of Americans who have a Facebook account, you’ve likely noticed ads in the margins of your home page for group-buying discounts in your area, offering sweet deals on everything from restaurant meals to spa services to recreational activities to specialty chocolates. Gone are the days of clipping coupons from paper circulars—the next wave of penny pinching is happening online, and en masse.

Good Things Come in Big Packages

Chicago-based Groupon, which grew from four hundred to more than four million subscribers between November 2008 and May 2010, according to USA Today, is the original group-buying site, but dozens of others—among them LivingSocial, Groop Swoop, and BuyWithMe—have quickly followed suit. These sites typically start out offering deals only in the cities where they’re headquartered, but many have expanded rapidly: LivingSocial, for example, launched in twenty-five new U.S. locales on September 16, 2010; the company’s services are now available in eighty-nine markets in three countries.

The basic business model is as follows: Each group-buying site offers consumers a wide variety of discounts in their particular geographical area. People who sign up for daily notifications from these sites then secure their loot through a number of different incentive programs: some sites won’t make these deals live until a minimum number of consumers request that particular coupon; others provide additional discounts, or even free goods, for users who persuade a specific number of their friends to buy the products as well.

The sites divvy up the profits with the businesses they partner with, and those merchants often experience noticeable—sometimes even staggering—revenue increases. On August 20, 2010, for example, the Chicago Tribune reported that in Groupon’s first-ever nationwide promotion, in which the company offered $50 worth of Gap merchandise for $25, the site sold 445,000 vouchers for the clothing megaretailer, an endeavor that garnered a whopping $11 million haul.

The Community That Pays Together Stays Together

According to Jake Maas, CFO and head of business development at LivingSocial, group-buying sites provide an ideal opportunity for consumers to get to know their own cities better. “From the beginning,” he says, “we’ve tried to make LivingSocial very relevant to your community. Our consumers really value diversity and use us to explore their city and discover new things; it keeps the experience fresh and fun.” To that end, the company hires locally based employees in every market it targets; these workers then comb their regions, seeking out prospective participating merchants that are authentically popular among those areas’ residents. LivingSocial strives to expand its reach not only to major cities but also to smaller U.S. markets, where residents espouse a distinctive pride of place that group-buying incentives reinforce.

Spreading the Word

Group-buying companies don’t limit their daily discount postings to their sites’ home pages; rather, they tap into the seemingly boundless power of social-media outlets, primarily Facebook and Twitter, as well as consumers’ personal email accounts, to propagate their products like wildfire. LivingSocial, for one, has its roots in building social-media apps, so this tactic is a natural fit; Maas says, “Social media is part of our core DNA, so we understand the power of those platforms and how to leverage them to make things fun for consumers.” Tools like Facebook Connect and Twitter’s “Sign in with Twitter” feature make publicizing daily deals from group-buying sites even simpler.

The Downside

The benefits of the group-buying business model undeniably outweigh its disadvantages; after all, as Maas says, “it wouldn’t succeed if it didn’t work equally well for consumers and merchants.” Still, not every retailer that’s joined forces with a Groupon-type company has been happy with the results. On September 11, 2010, Jessie Burke, the owner of a Portland, Oregon–based coffee shop called Posies Cafe, published a woeful blog post about the difficulties she’s encountered since she made the “terrible decision” to partner with Groupon:

“Over the six months that the Groupon is valid,” Burke wrote, “we met many, many terrible Groupon customers … customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who tipped based on what they owed (10% of $0 is [$0], so tossing in a dime was them being generous).

“After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign … So the experience jaded me, and the interactions with the few bad Groupon customers we had jaded our staff. After all of this, I find myself not even willing to buy Groupons because I know how it could hurt a business.”

Burke’s experience may not represent the majority of businesses’, but it’s not surprising. After all, the explosive proliferation of companies like Groupon belies the fact that their business model is still a fledgling one in the grand scheme of online consumerism, and that some chinks in their armor are therefore inevitable. As LivingSocial’s Maas explains, “It’s still really early—we’re experimenting with new things all the time, to deliver more deals close to where our consumers live and work.” One such feature is LivingSocial’s Family Edition, a direct response to parents’ requests for more family-oriented discounts; so far, this product is available in Raleigh-Durham, North Carolina; Minneapolis–St. Paul, Minnesota; and southern Connecticut.

Pay to Play

As with all successful e-commerce ventures, group-buying websites will likely go through several iterations before they finalize their features. But Groupon, LivingSocial, and their ilk are off to a running start, and that’s largely because they’re so well integrated with the markets they serve. In much the same way that social-media outlets both reconnect long-lost friends and introduce users pursuing common goals, group-coupon sites help reacquaint consumers with the cities where they live and play, as well as expose them to like-minded members of their communities whom they haven’t met yet. As the Internet continues to transcend geographical, social, and commercial boundaries, online shopping is increasingly for team players—but in this sport, no one has to sit on the bench.

The More, the Merrier: The Power of Group-Buying Websites was provided by DivineCaroline.com.