Thursday, December 22, 2011

The Illusion of Group (Social) Buying - There is No Such Thing as a Free Lunch

After much delirious activity in the South African Group (Social) Buying landscape, a more sober reality has set in.

After the arduous early years of my Engineering degree at University of Natal (now UKZN) time had arrived for our final 4th year lecture. Mr Gary Catlin, our Electronics lecturer, had the privilege of delivering it. He decided to cut the lecture short and spent half an hour taking questions. After several usual Q&A’s, a very interesting answer was provided to rather innocuous question. A student had asked “What is your advice for us young engineers when we enter the corporate world?”  His answer was a play on the age-old saying “Remember that in life, there is no such thing as a free lunch and if you are offered one, think twice before indulging”.

That statement had since become a precious motto for me. When I first heard of the GroupOn phenomenon in the US last year, this was one of the first thoughts that crossed my mind. Who is really paying for this scrumptious “lunch”? Recently, with the news of the Zappon and Dealify curtailing its operations in South Africa, this became an even more intriguing question. Here is my attempt to dig a bit deeper in to the under-belly of group buying.

Who is paying for this “lunch”?

It clearly is shared among the 3 key entities; this being either the advertiser who subsidises his products significantly with the hope of getting increased exposure and long-term clients, the consumer who frantically purchases the products or services that portray unbelievable value or the group-selling merchant (like GroupOn) who facilitates this transaction. The chance of it being the merchant was very unlikely, so I settled on the thought that majority of the lunch was paid for between the advertiser and the consumer.

I decided to conduct some research and interviews with merchants and consumers to get better insight and compare against my intuitive views. Here is the summary of my findings.

What is in it for the relevant parties and what are the catches?

What is in it for the entity?
What are the catches?
Sell products online at discounted prices as a marketing exercise

Get instant exposure to several thousands of social-buying users of their products or services.
- No upfront investment required for the advertisement and exposure. 

- >50% discount to be provided on the regular price of the product
Up to 50% of the sales price is commission that goes to the group-selling merchant.
- In effect this means that most advertisers are only getting about 25% of the regular price; which, unless you were previously ripping off your customers, means you will be making a loss on each of the product sales.
Once a customer buys a specific product/service for a reduced price, it is highly unlikely for the same customer to pay a higher price afterwards for the same item. Thus the promise of repeat visitors is a bit of an over-promise and requires significant effort to convert them.
The short surge in regular order volumes will stress the after-sales support structures in terms of quality of service.
Lack of guidance in terms of how to convert the coupon customers in to regular customers.
Poor support structures from the group-selling merchant to take on queries and complaints.
Follow the regular deals portals and buy suitable coupons.

Good savings on regular day-to-day products and services.
Ease-of-use, immediacy and good user experience in terms of buying. 

Inflated savings and value often promised in the offer.
At times dealt with as an inferior client by the merchant due to being a coupon buyer.
Poor support from the advertiser/seller due to unplanned volumes of transactions and other poor infrastructural issues.
Poor support from the group-sales merchant with regards to queries, concerns, refunds and quality of service.
Lots of clauses with regards to the validity of the coupon (eg: deal is only available on weekdays, when it is difficult for you to use it)
Tendency to buy more that you require and the issue of un-used coupons is a common occurrence. 
Group-Selling Merchant (eg: GroupOn)
Facilitate and support the transaction lifecycle between the advertiser and the consumer.

Simple technology infrastructure and rather small upfront capital required to setup the operation
Lots of market hype to drive customer usage of these services
If there are good volumes per deal, this is a high margin business.
This entity has to deal with disconnect and complaints between the buyer and the seller. Especially in terms Quality of Service.
Extreme competition between different operators. 

The under-belly?
If you go through these various facets, the deal is not nearly as sweet or clear as the exterior portrays. Even the term “group-buying” is a charade as the minimum order criteria is often as small as 5 or 10 for a low-medium cost item, which makes a mockery of the group purchasing power concept. As a whole, there are various things that make the whole scene a bit murky. As a casing point, on the website of a leading group-selling merchant, a contact number for support is almost impossible to find, refund policies and procedures are unclear for un-used/expired tickets, support by email is shoddy, deal descriptions are often inflated and without full consent of the seller, commission structures and fees for advertising merchants are not transparent. All of this smells of something rather foul to me.

For the merchants, more often than not, the exposure through the group-buying portals has not turned around a struggling business or increased revenues and volumes in a sustainable manner. Blame cannot all be laid on to the group-selling merchant, as I have observed many of the selling merchants not doing anything significant to convert the once-off bargain-hunter in to a loyal customer. Most merchants that I conversed with had mixed feelings about the concept, some were glad they did it, many wish it were done differently from both their own proposition as well as the support from the group-selling merchant and some regret having done it. From a customer point of view, there are large volumes of un-used/expired coupons, where the refund processes need be made a lot clearer. There are policies around refund for expired tickets, but getting fast response from the merchant is almost impossible. This under-belly cannot be kept under the hood for much longer and the industry will need to clean itself out before it is too late.

What is the future of group/social-buying?

Social (Group) buying is just another flavour of eCommerce. eCommerce will continue to gather pace as customers look for increased control, comfort, immediacy and an improved overall user experience; however Group Buying in its current shape cannot survive for much longer in my opinion. A more sustainable and transparent business model will need to evolve out of this and more likely than not the concept of social buying and referrals, without the presence of massive daily-deals websites could be the order of the day.

For the interim, the existing providers and selling merchants need to jack-up the game very quickly, while figuring out the longer term strategy. The advertising merchants need to focus a lot more on providing a differentiated customer experience to the coupon buyers and should have a well thought-out strategy on converting them in to regular customers.

On the flip-side of the coin, the group-selling merchants need to focus on getting a better connection between the buyer and the seller, thus being able to provide an end-to-end user experience. There needs to be better focus from the group-selling merchant to work towards the sustainable success of the advertiser, thus creating demand for the services, which is currently under severe threat. Better transparency, guidance and training for the merchants would be a start.

NB: This article represents my personal views and is not that of any institution or other entities that I might be related to. All comments and suggestions are welcome by email Follow me on twitter

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