Is there any start-up mileage left in the group buying model?

The group buying model spearheaded by US firm Groupon has caught on like wildfire in Australia, with a plethora of similar sites including Zoupon, OurDeal and Spreets opening up shop over the past year to offer their services to an Australian audience.

For the uninitiated, group buying sites generally set up a website and offer consumers deeply discounted, loss leader offers from businesses, often restaurants, beauty salons and hairdressers, looking to build market share and profile.

Group buying explained

The model challenges traditional forms of advertising and attracts smaller businesses that don’t have large marketing budgets because it offers extremely cost-effective national and even international exposure.

Many of these sites are known as social buying sites. They promote an offer a day, but for the offer to be successful a certain number of people have to sign up for the deal, otherwise it is withdrawn and buyers are refunded their money, the idea being to encourage people to promote the offer through their own social networks.

The model has its limitations and there are also concerns the market is already saturated in Australia, prompting speculation there will be consolidation in the sector.

Nevertheless, small start-ups could be the best positioned to enter this boom sector, either as a group buying portal or to generate sales and revenue through promotions featured on these sites.

Saturation or opportunity?

In Australia, the group buying market can be split into self-funded businesses such as Zoupon and businesses with a corporate backer, for example Cudo, which is owned by PBL Media. Last week, group buying site Jump On It secured $5 million in funding from global player LivingSocial.

Adam Schwab, managing director of Zoupon, says the group buying model is more suitable to smaller businesses.

“If done right, managers with a strong commercial and digital background can be cashflow positive reasonably quickly,” he says.

“But the saturation of the Australian market offers limited upside and it is probably not a model that’s worth rolling out for a larger firm.”

Schwab says Zoupon achieved a 100% improvement in revenue in its first three months and has grown to more than 250,000 mail-out and Facebook members in less than six months.

Commenting on the likelihood of consolidation in the sector, Schwab says it’s possible to guess which group buying businesses see themselves as takeover targets by their behaviour.

“A few operators, including some of the larger players, appear to be running their business with the clear intention of selling to a cashed-up foreign operator,” he says.

“Those companies don’t appear to form lasting relationships with their clients. Others, like Zoupon or Cudo, have a longer-term business horizon, trying to build relationships with their clients who will run advertisements multiple times each year to capture a new client base.”

Breaking the market down

At the moment, most group buying sites in Australia offer deals across a range of industry sectors.

But in the US group buying sites that specialise in a particular industry sector are springing up and Groupon offers its clients the option to tailor their deals, for example, giving females the ability to receive beauty and spa deals and males food and drink deals.

But, says Schwab, the Australian market is not quite ready for sector-specific group buying offers “until there is greater recognition of the industry from business and customers.”

Intriguingly, media group Anthill’s CEO James Tuckerman recently floated the idea of using the group buying model for the entrepreneurial website. Online commentators suggested the business could offer group buying opportunities in areas such as trademark-in-a-box, logo design and software.

Greg Weinbren, CEO of group buying site Ouffer Australia, says despite the rapid entrance of new players into the market “only the strong will survive. Ultimately it comes down to the strength of your database and the ability to offer the best deals. Because there’s little to differentiate the players.”

Weinbren says aggregator sites such as the US-based Dealradar that show all the daily offers in the one place are also gaining traction and levels the playing field among the different operators.

Discount strategy

But from the perspective of the businesses that advertise on group buying sites, the model has certain drawbacks. The challenge is to manage offers so that they generate repeat business, not just one-off interest from bargain hunters.

It’s also important to manage the process so that the enterprise isn’t swamped with work while an offer is current, only to leave the business with excess stock and staff when the offer ends.

Weinbren’s advice to meet this challenge is not to offer deals that are “discounted too heavily.” He also says it’s important to limit the number of coupons to a manageable level for the business and stipulate, especially with restaurant deals, that a booking is necessary to use the offer.

If an offer is over sold and the business can’t meet its commitments (for example if 200 people turn up at the same time to eat at a 30-seat restaurant that has issued an offer) it risks damaging its reputation in the market.

Weinbren also points out individual vendors have different approaches to the group buying model. “Some people see it as a way of securing future business, others just see it as a profit-generating exercise.”

Growing Australian market

Alex Levashov, founder of online marketing business Altima Interactive, who has conducted research into group buying, says in Australia “the market is still young and the industry is still growing.”

But he questions the value of the group buying model for some small businesses, pointing to US research into 150 businesses running Groupon promotions between June 2009 and August 2010 conducted by Rice University’s Jones School of Business that found campaigns were unprofitable for 32% of the businesses surveyed.

The research also found that more than 40% of those surveyed would not run similar promotions again.

In addition, of the respondents who reported their promotion was not profitable, only 25% of people who redeemed coupons spent more than the face value of the coupon.

Plus, only 13% of coupon holders returned to purchase products at full price. In contrast, 66% of those who said the promotion was profitable said an average 50% of coupon redeemers spent more than the face value of the coupon and 31% bought full price products.

The research also showed that businesses that limited the number of coupons in a promotion reported more demand than those that didn’t and that restaurants sold more coupons than other businesses.

“Businesses that use these promotions have to be prepared for a large influx of customers,” says Levashov, who also says businesses that deliver a high level of service to coupon holders increase the chance they will return and pay for full price products.

“Businesses have to think carefully whether they can service coupon holders and whether a large number of first time trial consumers will be positive for their business,” he says.

“It is a model that does work for some businesses, but they need to put thought into how best to use these promotions and ensure conditions attached to coupons are prominent. The biggest concern for this model is whether bargain hungry consumers can be turned into regular customers.

“If customers genuinely enjoy the experience and get good service they will be more likely to return,” says Levashov, who advises businesses thinking of running group buying promotions to run a test campaign and analyse the results of the campaign to work out whether it’s worthwhile to run a more extensive promotion.

Says Weinbren: “it will be interesting to see what happens in the New Year – there are too many businesses in the space already and there are only a certain number of facials a woman can have.”

Business benefits

What about the benefits to small businesses looking to reach customers via group buying sites?

Emma Carl is the proprietor of Queensland-based beauty salon Mirror Beauty and a client of Zoupon. She says “after being at first dubious of the benefits of offering a treatment at such a discounted cost, I have found that it has introduced my business to a wider market, particularly outside my local area.

“Zoupon has also provided me with a much larger electronic database with which to share my internal marketing promotions.”

“The biggest rules I live by with Zoupon clients are to get their details – we have been doing a monthly newsletter that offers our own salon specials for years and we know that Zoupon clients love a bargain and are computer savvy. Email marketing is fantastic for the type of clients you attract with Zoupon.”

“We also make sure we treat every Zoupon client to a world-class treatment that is unique and different from any other they have ever had. A Zoupon client is not interested in your salon or what you offer so winning over a Zoupon client is very difficult.”

“I think the biggest mistake that business owners make is not giving a discount customer the same treatment as a full paying customer.”

“You need to go above and beyond with these customers because their discounted treatment with you may be the first time they have been to your salon, and you need to leave a lasting impression on them to make you one of their necessities, rather than one of their luxuries.”

“The idea is to entice them to make a second appointment, offer them discounts on their next treatment, or make them aware of your current specials. Ask about their current salon, and explain how your treatments and service are better.”

Keeping brand equity

Carl also limits the number of offers she makes through Zoupon so the business isn’t too swamped.

“Flooding internet sites like Zoupon with deals makes your branding appear cheap. I use discount sites at most three to four times a year.”

“Also, I find that Zoupon works well in an owner/operator environment, because my staff members can focus on my regular, full paying clients.

“This leaves me free to focus on the needs of the Zoupon customer without having the increased staffing costs associated with the extra business.

“This ensures that any income generated from Zoupon sales is not replacing my regular income, but is merely a bonus that I can put back into the business.”