The Economics Of Group Buying Sites

By Porcshe Moran | May 01, 2011 AAA

Not many people can resist a sale - especially in a weak economy that has forced nearly everyone to tighten their belts. Group buying sites have entered the market in full force offering consumers deals that go far beyond the traditional coupon. These upstarts have also provided new options for small businesses to market their wares. (Reducing the amount you spend is the easiest way to make your money grow. See 5 Money-Saving Shopping Tips.)

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How It Works
There are several group buying sites available for shoppers. For the most part, they all operate on the same principles. Consumers sign up for free to the site(s) of their choice by providing an email address. You must also provide information about the city in which you live, as the discounts are localized. Subscribers receive daily emails with a featured deal that is usually at least 50% off and up to as much as 90% off the regular price. Fifty-percent off of a spa treatment, 50% off tickets to a comedy show or 70% off two months of yoga classes are examples of the types of deals that are offered.

The deals are only given out if the minimum number of people purchase the deal in the specified time. If the goal isn't reached no one gets the deal. This is when the group buying element comes into play. Those that want the deal are encouraged to use email and social media to promote the deal to other potential buyers. Other incentives are also offered to subscribers. For instance, on group buying site Living Social, customers get a free deal if they can get three other people to buy that same deal. On Groupon, users can earn $10 in Groupon bucks that can be used towards the purchase of any Groupon each time they refer a new user to the site.

How the Deals Impact Business
Most group buying sites have no initial fee for the businesses that use the deals to market their goods and services. The sites make their money by taking a percentage of the revenues from every coupon purchased. The businesses get more traffic and advertising once their deals are purchased, without having to spend any money. The goal is that customers that wouldn't normally visit the business will be attracted by the deal and then become repeat customers.

The Group Buy Marketplace
The popularity of group buying sites has resulted in a saturation of the marketplace as more and more deal-a-day companies are created. There are more than 500 group buying sites worldwide. Google offered Groupon, a pioneer in the group buying craze, a $6 billion buyout. The company rejected the proposal, so Google launched a competitor site called Google Offers in early 2011. The site is currently in BETA, and only people in New York City, San Francisco, Portland and Oakland can subscribe.

Facebook has also joined the trend. The social media giant launched Facebook Deals in November 2010. The service works in conjunction with Facebook Places which lets people to "check-in" on Facebook when they go to various physical locations. When a customer checks in they get information about the deal and a post is put on their wall allowing their friends to find out about the deal. It is considered to be word-of-mouth marketing. Facebook Deals offers four different types of deals: friend, loyalty, charity and individual, to allow business owners to tailor to their customers. (Use coupons strategically to score big savings on everyday purchases. Check out Coupon Shopping: Clip Your Way To Savings.)

The Bottom Line
These days everyone is searching for a deal. A swarm of start-ups have entered the market to meet the growing consumer need for a bargain and businesses' need for new marketing opportunities.

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