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Yesterday, group buying service LivingSocial, which recently raised $175m in investment from Amazon, created quite a stir when it sold more than a million $20 Amazon gift cards for $10.
Not surprisingly, the frenzied buying only prompted more discussion about the group buying market, which is already one of the hottest on the consumer internet.
But behind the buzz, are cracks in the group buying model becoming more prominent?
While LivingSocial's Amazon deal, and Groupon's Gap deal before it, have amazed with their volume, the bread and butter in group buying is still offering deals on behalf of local businesses.
The supposed value proposition for local businesses: you might lose money on the deal, but you'll acquire new customers, many of whom will keep coming back. Or, as Groupon puts it, "valuable new customers, guaranteed."
But is that guarantee really one you can take to the bank? There's a lot of anecdotal evidence from business owners who have tried group buying sites like Groupon, and many complain that the customers who show up aren't exactly ideal. Customers themselves admit that they're not interested in frequenting the businesses they buy deals from.
But a recent conversation I had with an acquaintance in the U.S. about the group buying market in South America resulted in a new and interesting anecdote. When discussing the new customer acquisition issue, my acquaintance mentioned that she had recently received several emails from a local business she frequents.
The emails alerted her to the fact that the business was going to be featured on Groupon. Needless to say, as an already-loyal customer of this business who has never minded paying full price, my acquaintance was a little bit surprised that the business was promoting the deal to existing customers via its mailing list. The question: why would a business want to communicate to some of its most loyal customers (those who have opted in to its mailing list) that they can buy $xx worth of services for more than half off?
While there are plenty of possible answers to this (business was slow, it was no different than a 'reward' sans segmentation), the fact that some businesses are apparently starting to mail their existing customers promoting deals that are supposedly designed to facilitate new customer acquisition says a lot about where the group buying market is headed.
After all, if a business is hoping to lure in existing customers that it already 'owns' the relationship with, why should it discount its services by upwards of 50%, give half of the resulting revenue to Groupon, and let Groupon take most of the credit for the exchange? Why not simply sell such a deal themselves and keep everything?
In my opinion, answering this reveals two inconvenient truths:
- Some businesses recognize that group buying isn't about new customer acquisition. They simply want a one-off spike in revenue, margins be damned.
- Others are flying blind. They know group buying is the hot thing, but they have no idea how to use it strategically and the Groupons and LivingSocials of the world have no incentive to help them figure it out.
Despite Groupon's massive valuation to LivingSocial's massive Amazon deal, behind the buzz it's increasingly clear that the group buying value proposition local businesses have been sold isn't exactly legitimate.