Last week I got into a discussion with few friends about group buying business. Group buying is hot these days with many success stories such a Groupon and LivingSocial. So I decided to do a post to highlight few peculiar characteristics of group buying businesses.
Deals or discount coupons have been in existence for quite some time but the concept got phenomenal success in recent times when companies like Groupon married social with deals. The combination of social and deals is relatively new and has many unique qualities. Here are few of them.
1) Sales driven business
Most consumer internet business tends to be product driven. The primary driver for traffic and consumer adoption for most internet business is the product. Marketing and Sales takes a secondary role. But group buying business is not a product driven business. The product itself is very simple that just provides a listing of deals and has few viral elements built into it. The main business driver is sales. Groupon has been successful because of sales ability to source great deals with local businesses and build excellent relationships.
2) Low switching cost
I often use example of Facebook and Google to explain switching cost. Switching cost of Facebook is very high. It is very difficult for someone to create another similar social network and compete with Facebook. Even if someone creates a much better product than Facebook, it will be very hard to make people switch to it because all their friends and contacts would be on Facebook and it would take a long time to make them all switch to new product. A social networking product without having friends using it is useless. Therefore, switching cost of Facebook is very high. On the other hand, switching cost of Google is low. If someone comes up with a better search algorithm than google then I won’t think twice before switching to new search site. Same is the case with group buying businesses. Switching cost is low because I don’t care which group buying site I use as long as I get a good deal.
3) Low entry barrier
I believe group buying space will be highly competitive with low margins for all players. The reason I say that is because barrier to entry is very low. Technology behind business is simple and easy to reproduce. Business is local in nature as you have to create sales relationship in each geography that you want to operate in. Even if you create great sales relationship in one geography, it can not be replicated in other geographies. You have to work from scratch to create new relationships in different geographies as you expand business. Therefore, barrier to entry is low and it is easy for new players to get in the business by focusing on specific geographies.
4) Good for businesses where customer acquisition cost is high
Group buying sites are very good for businesses where cost of acquiring a customer is very high. It provides an alternate channel to reach out to a large customer base and make them an attractive offer.
5) Good for perishable inventory business
A business has perishable inventory if the resource is not used within certain timeline. Think about hotels or a spa. If there is an empty room in a hotel or a free slot in spa, it’s a wasted resource. It can’t be used at any other times. Variable cost of serving an additional customer is very low in such situations and the revenue generated by serving the additional customer almost directly contributes into profit margin. Group buying business is excellent for such business because they can manage the yield by putting an attractive offers to fill-up slots during dry periods.