What Are the Setbacks of Having a Group Deal, or a Group Buying Website Business?

May 16, 2012 by  Filed under: Advertising 

A group deal or a group buying website is created to direct a group of customers to a specific business. The number of purchases for each deal can potentially range from ten to thousands of purchases depending on the popularity of the deal listed. Most deal companies charge their merchants around 20% to 50% depending on the type of deal. A simple calculation to estimate the potential earnings of a business running on this concept is as follows. On a 30% profit-sharing with merchants, selling 100 $30 vouchers will earn the deal business only $900. However, if they are able to sell 1,000 vouchers, their earnings could go up to $9,000!

On the surface it is indeed an attractive business to invest in, but let us go behind the business scenes to expose why group buying websites do not have a sustainable business model.

1. Deal websites attract the “Saving” crowd.

The “saving” crowd excludes rich consumers. The rich will not spend time daily browsing deal websites to find bargains. They are busy and have better things to do. Time is precious to them and booking in advance is a definite “No” because their schedules are unpredictable. This means that their main target market is the middle class who love to save, and the poor.

If merchants think that the customers will come back again after visiting the outlet the first time using a deal voucher, then they should think again! Customers only go to dine in a merchant’s restaurant because only after the discount, it is affordable to them. Thus, even if their food, product, or services is excellent, they will not be repeat customers if they have to pay full price because it is simply not worth it, since they have already dined in the merchant’s restaurant or joined the merchant’s tour at more than 50% discount. Once merchants collaborate with deal companies, they will forever need to offer the same kind of discounts to attract the same group of customers. A worst scenario that may happen is that merchants lose their full paying existing customers because they have bought the deal!

2. Deal websites are unable to control merchants’ service.

As we know, most merchants who advertise with a deal company are either new, or are hungry for customers because no one seems to visit their premises. If a merchant is full house all the time, do you think it is necessary for them to cut their earnings by advertising in a deal website? Certainly not! Therefore most of the merchants who advertise cheaply on deal websites are struggling to sustain their business. This may mean using deal websites to attract consumers to clear off their excess stock or expiring food supplies.

When businesses are struggling to survive, they will do whatever they can to reduce the loss of earnings that were given to the deal company. This includes cancelling expensive food from the menu by informing customers that they are out of stock, reducing the number of staff, limiting the number of customers who book using the vouchers during weekends or public holidays, insisting that only off-peak times are available for booking, using cheap packaging for products etc. Quality of service from merchants are compromised because they do not see the need to provide good service to bargain customers whom they hardly earn any money from after deducting all their expenses and after giving a huge chunk of their earnings to the deal companies. Every dissatisfaction that arises from a poor customer experience will lead to tension between deal companies and merchants, merchants and customers, and also between deal companies and customers. This tension is escalated when consumers ask the deal company for a refund of the deal purchased or used. A whole bunch of customer service staff is then needed to manage these complaints. Who will bear these costs? Will you?

3. Group buying websites are easy to duplicate.

If you take notice, deal companies always recycle deals that have been promoted by other deal companies. This is because it is impossible to hide your merchants and for all that effort to get a new merchant, two weeks later, you see another deal website offering the same deal at the same price or less, minus the manpower to search for a merchant who is willing to advertise through a deal website. The first mover to list a special deal has some advantages, but not for long! That is why many group buying websites are buying other group buying websites to reduce the competition.

Despite the takeovers, the number of open source codes that are available made it easy for new entrepreneurs to set up group buying websites while the mature business made it simple for them to pull in a range of existing merchants from other websites. If deals are the same, what then makes a group buying website different from another group buying website? Is it a 100% money back guarantee, or a friend referral system? Both of which will add extra cost to a group buying business and the latter will add duplicate users in the user database. Duplicate users is a good thing if the company is planning to sell off its website, but it’s a bad thing if merchants found out that the same user has used multiple accounts to purchase the same deal if each user is only entitled to purchase one voucher.

4. Group buying websites encourage people to spend, not to earn.

Nothing beats a business model where people get to earn instead of save. This is because by saving, people are still spending. You need to spend money in order to save money but you do not necessarily need to spend money in order to earn money. When customers realise they have spent too much in group buying sites, they will one day come to realise that enough is enough because they are draining their savings by buying more of something they want out of greed than something that they truly need.

After considering the disadvantages of having a group buying website business, are you still thinking about investing in this business? If you have the capacity to overcome all the headaches that comes along with this business model, make it a deal to deal first with the problems above as they will surely come along, or else my advice is to find other good business deals!

Australia Business Network ( http://www.australiabusinessnetwork.com ) reviews businesses, business models and strategies, and business events in Australia. We equip entrepreneurs with practical business knowledge and provide networking opportunities to business owners in Australia. For more information on deal reviews and comparisons in Australia, visit us at http://australiabusinessnetwork.com/Deal-Reviews.php

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