The Gray Hair Speaketh

Advice that is largely Unsolicited..

Group Buying: Thoughts About The Business Model

What is your reaction when you see a physical product offered at an unbelievable low price??

Like a two-wheeler at 50% of its price? Or a TV at 40% of its selling price? Or even gold – at 30% discount??!

My own first reaction (tampered as it is by standard thought process on gross margins available, etc.) is that it cannot happen! Or that maybe it’s a scam. It is not the real thing. It is second-hand. It is fake gold, etc. etc. etc.

And then you look deeper. And get a bigger understanding of the process.

Every advertiser is looking for that eternal ROI. How many crores spent on making the VW Vento ad speak to Times of India readers? How many increased walk-ins to the showrooms? How many cars sold?

And calculations of that kind!

So when a group buying company suggests to you that:

–          you spend money on expensive advertising (hoarding, print, TV etc.)?

–          you want to drive footfalls and sales

–          what if that is assured to you anway

–          and you cut to the chase

So that, essentially is the model for group buying!

Divert the money out of advertising.

Put the same budget in offering exciting discounts.

Use the group buying vehicle to reach the customers who want your product.

There.. the ROI is in for the budget allocated.

But.. is it really that simple?

If its not that new mousetrap, but rather the unbelievably cheap mousetrap, there are good chances that you’d have a queue outside your door, and you can sell as much as you want.

But the questions then, are:

  1. Did you advertise only to reach those few buyers who would walk-in or purchase? If that was your intention, then some means of targeted direct marketing / telemarketing would have been better options, than mass media advertising, right?
  2. Your purpose of advertising was to also reach those were not going to walk-in today or purchase in the near future. People who may still register your brand somewhere in their heads, and think about you, as and when they get to a point of purchasing your product category. Or to create a general brand hype / visibility etc. Just cutting to the chase and getting those 40 walk-ins, gives you ROI, but does it give you that visibility at all?
  3. Will the buyer perceive that maybe your product is actually worth 50% of your selling price, and the rest of your normal mark up, is your huge profit. And which you should not be earning, really? Could that actually cause more harm than good, in the long run?
  4. Also where do you create your market for tomorrow? If you have not pushed the brand out as much, and have resorted largely to the short cut, discount driven, group buying options, the rest of the world has not been impacted by your brand. And you have left tomorrow’s market open for your competitor to lap up?!

At a time when brand managers are pushed to deliver ROI and a group buying option appears to get them there, there will be temptation to pick it up. And sell at less than cost, by explaining the difference to the marketing budget account. But I wonder if this is sustainable in the long run.

So is all group buying bad for brands? Certainly not.

Where you have perishable inventory, group buying is a beauty. Airline seats, hotel room nights, even food products approaching ‘best by’ dates. Better sold at cheap than not sold at all. And good for the buyers too. Perfect win-win.

Or for categories like services. Where each new service customer is not draining away real cost, but only utilizing the excess capacity that is anyway, idle. Theatre seats, saloon chairs, gym memberships are the examples I refer here.

What I have concern about, are physical product areas, where attempts are made to sell cheaper than cost price – by a lot – and which can over time, potentially do more harm than good, to the concerned brands.

What do you think? Love to read alternate opinions on this.. please comment below!

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October 12, 2010 - Posted by | Ecommerce | , , , , ,

14 Comments »

  1. […] This post was mentioned on Twitter by Wickram and Sampad Swain, Sanjay Mehta. Sanjay Mehta said: Group Buying – the business model. Some questions I pose: http://bit.ly/bxhZnj Comments? […]

    Pingback by Tweets that mention Group Buying: Thoughts About The Business Model « The Gray Hair Speaketh -- Topsy.com | October 12, 2010 | Reply

  2. Sanjay,

    Great article!! Having over 15 years of purchasing/sourcing experience, I have noticed that many of these small business owners (who are being targeted by the large group buying sites) don’t understand or accept the impact of “lost leader” sales. We, at groopful.com, have an innovative way to group buying. Instead of driving the business to the lowest possible sale price just to get sales, we are approaching it differently. We want to truly partner with the business to understand their margin levels and what volumes of sales can be met to help drive the targeted sales. This means that they may need to sell 20 units instead of 10 to get the same margin but they are getting additional footsteps while mainitaining their targeted margin dollars. I would love to get your feedback on our model.

    Comment by jcastle | October 13, 2010 | Reply

    • Hi J Castle,
      Margin vs volume is a natural process, and must be followed.
      But the brand needs to make sales at larger margins, needs to keep their visibility to tomorrow’s market, and not divert all their marketing dollars, to passing on volume discounts as loss leaders, for getting today’s footfalls. That to me, is a disaster strategy.

      Even airlines have multiple classes of seats, only to ensure that they not only use most of their capacity, but also at different margins, so as to make a net desired sum, for every flight!

      Comment by Sanjay Mehta | October 13, 2010 | Reply

  3. Sanjay,

    Great read..agree with u there..

    my 2 cents is:

    Large discounts to the end customer dilutes the perceived value the customer has for ur brands n it also leaves ur distributor/ resellers with a lower margin..

    tat said, group buying is a wonderful concept which should strongly communicate the disc given BECOZ ‘the purchase is in bulk’ and not the discount itself..this, I believe will go a long way towards brand building..wat u r doing here is building tat community feeling which builds a trust factor on the product..where ppl say – hey there r these many ppl buying this product with me, they trust it, i should too…becoz of the bulk availing i am getting a disc!!

    Cheers

    Comment by Saptarshi Chatterjee | October 13, 2010 | Reply

    • Saptarshi,
      Agree with what you say. That there is bulk being purchased gives a sense of trust and credibility for the brand. But discounts to the tune of 50% on physical products (as against services) seem hard to believe, even in the bulk sense. Those will do more harm to the brand, in long run, than good.. is what I feel.

      Comment by Sanjay Mehta | October 13, 2010 | Reply

  4. I was considering this for two of my clients, one a Hotel and the other a theater hall.

    Both have perishable goods and partially service based. A strange co incidence that just this week have fixed meetings for both the clients with one such group buying portal. Nice to read this just before entering into taking a decision

    Comment by Ankita Gaba | October 13, 2010 | Reply

    • Good timing then..
      For hotels and theatre, it will help..

      Comment by Sanjay Mehta | October 13, 2010 | Reply

  5. Thanks Sanjay

    Completely agree on the product part. And even if I buy a product from a group buying site today, I am not likely to be a return customer for that product co. I got a discount I took it, tomorrow its a new story.

    For service again, I may not go to the same place again, but if its the perishable inventory that they encashed at a discount its a win win.

    From a service providers perspective, If a group buying site has a good classification of local customers (and I don’t mean city level but deeper), than it may make sense to send out a buzz once. After all I started Dominos after getting the 1+1 coupon years back.

    Comment by Annkur | October 13, 2010 | Reply

    • Annkur,
      See, with services, if there is a regular saloon that you go to, and you get a discount, you can imagine – they have empty seats, and they are filling it up. Same for theatres. But when it comes to products, you cannot imagine that discount.. so you do question. And you may not get it again, and you will not use the brand again!

      So for the brand, it looks like a lose-lose!!

      As regards going deeply local, that is indeed the holy grail of group buying sites. And which is why they fear the entry of a local yellow pages brand, who may eat their lunch after all!!

      🙂

      Comment by Sanjay Mehta | October 13, 2010 | Reply

  6. Sanjay,

    I wonder how they can afford to give 50% discounts! Is it really feasible or they are selling those products (physical) at loss just to increase their numbers or meet the targets?

    Comment by Harman | October 13, 2010 | Reply

    • Harman,
      That is what I was conveying.. they divert 1 cr of ad money, to give 10,000 discount on each piece.. they can get 100 customers? Now, for the brand, it is diversion of budget to acquire actual sales of 100 customers. The budget of 10,000 x 100 has not come from product costing, but from marketing budgets. So on paper, the transaction is still profitable.

      That is the theory at least.

      What I point out in the post is that this theory has huge flaws.. and it is like a mistake for the brand!

      – Sanjay

      Comment by Sanjay Mehta | October 13, 2010 | Reply

  7. Sanjay.
    Makes sense! BTW in your example, there should be 1000 customers. 🙂 It is certainly an experiment & definitely can have adverse impact on Brand Image.

    Comment by Harman | October 14, 2010 | Reply

  8. […] For those who follow this blog, it is no secret that Group Buying, especially in the shape that it has taken in recent months, is my favorite whipping boy!! […]

    Pingback by GroupOn, Living Social, Snap Deal etc. – Is Deep Discounting the last resort of the failed salesman?! « The Gray Hair Speaketh | January 26, 2011 | Reply

  9. very very clear concept …………..

    Comment by Amit Agarwal | June 16, 2011 | Reply


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