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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.

Patricio Robles

Published 20 January, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (6)

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Rene Power

Personally not buying the argument for businesses. Case in point - when was the last time anyone paid full price in Pizza Express or went in without a printed 2 for 1 voucher? It has become the norm and for scores of businesses.

Sure the restaurants are probably full more of the time, but with recession minded consumers who aren't particularly loyal just looking for a deal.

over 5 years ago


Tym Barker

Finally someone else who agrees with me! I get "the model" (including John Batelle's excellent argument), but especially for "charge for time" businesses GroupOn is a disaster.

God bless the local chiropractor that gives away 1,000 appointments for $15 each (net to him) instead of his normal $60 per appointment. He'll be an entire year performing "free" appointments. Good luck EVER recovering that investment in repeat visits!

over 5 years ago


Philip wilkinson

Patrick - this is a very generalised opinion piece without a lot of research. Not all group buying sites are like Groupon and Livingsocial.

Here at Keynoir, we've deliberately grown slower in order to attract a much higher quality audience / set of members who appreciate discovering new handpicked places around London as much as they do in getting a deal and work closely with partners/merchants to package the right deal for both them and us and limit the volume so they can cope.

In fact, local businesses get a lot of value from us:

1: a professional editorial written about their brand and products (our editors also work for Grazia and DailyCandy), with great imagery.

2: every member on our 140,000 strong list sees the brand whether they buy on the day or not. In fact members now have learnt about a new place and often book directly a few weeks later.

3: we learn everything we can about the business and give them our full attention on the day, giving them full coverage on our email and site right through to handling all the customer service questions both on the day and for 6 months afterwards.

4: on average, our members spend 30% more than the average clientele of the business, as they have high levels of disposable income.

5: 90% of our members say they will revisit the place they bought the original Keypass/deal from repeat purchasers

That's why 95% of our merchants want to run with us again and again (half of the remaining 5% are because we refuse them if they don't give members a high enough level of customer service).

In summary - not all group buying sites are created equal.

over 5 years ago


buyer beware

Patrick Wilkinson, you don't have editorial or editors. There is no such product in law. What you have is copy writers and a marketing network. Editorial by law cannot be bought by you to promote your offers, thank heavens. Try Googling "OFT editorial advertorial" and read up on what the law says. Being in breach means either a huge fine or up to two years in prison. Why did Keynoir give away an Amazon voucher exclusively through moneysavingexpert if it is an upmarket website? On LivingSocial's offer of Amazon vouchers, I read on a forum that Amazon acquired only 7 new customers from 1.4 million vouchers given away because of computer generated multiple applications and that 1.37 vouchers have already been used to buy Sea Pals by Russ Purple Tang for $9.47 @ with free delivery which are now appearing on eBay for half price (smiley face).

over 5 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy


1. "In fact members now have learnt about a new place and often book directly a few weeks later." How exactly do you know this? Unless you a) share your member list with your merchants, b) your merchants track and personally identify every customer and c) you work together to cross-reference with your list new customer acquisition, quantifying this to any meaningful extent is next to impossible. Note that in a local area, it's quite possible that your members have already heard of the businesses you feature, so you can never truly identify whether a member learned about a business through you; you can only accurately attribute the sale you facilitate.

2. "On average, our members spend 30% more than the average clientele of the business, as they have high levels of disposable income." I'm a little confused here. If a customer buys a restaurant voucher for £50 worth of food for £25 from you, are you saying that this customer will still go on to spend 30% more than the average customer of said restaurant? I find that very hard to believe. Are you really claiming that all of your merchants are collecting this information and reporting it back to you in large numbers?

3. "90% of our members say they will revisit the place they bought the original Keypass/deal from repeat purchasers." How many actually follow through?

4. "That's why 95% of our merchants want to run with us again and again..." Groupon touts a similar figure, yet an independent survey of Groupon merchants found the number interested in repeating the experience to be much smaller.

Finally, I'd make an interesting observation about your site: miraculously, every past deal you've offered is listed as "Sold Out." For instance, I see that your January 21 deal ("£16 for Four Cocktails at the Viajante Bar") is listed as sold out. Yet over the weekend, I saw that exact same deal is listed as Today's Extra Keypass, and there were still 45 vouchers left...

over 5 years ago

Jeff Molander

Jeff Molander, CEO at Molander & Associates Inc.

Patricio... Brilliant critical thought and fantastic structure / substance to your commentary. You will find this research to be in line with your hunches.  Business owners are extremely naive. http://bit.ly/fOCLXC

Surprisingly, the top two factors (according to this research out of Rice Univ.) predicting a Groupon promotion’s effectiveness are:

1. How satisfied employees were with Groupon shoppers (did they tip more, or are they deal-seekers as an example)

WOW.  That's shocking.

2. The promotion’s effectiveness in reaching new customers 

Note: Not the profitability of those customers; after all, advertising doesn't focus on that outcome either.

In other words, what matters less to most store owners is:

1. Generating sufficient additional sales at full price to warrant the steep Groupon discount

Again, "profit?"

2. Finding and retaining customers who come back and pay full price.

To the extent that, now Patricio, they'll even go as far as mailing existing customers to get people in the door... and begin the "training" exercise (training your best customers to expect discounts)

over 5 years ago

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