Group-buying a raw deal for businesses

In recent months, the Groupon-inspired group-buying phenomenon has sparked a wave of blatant copycats both at home and abroad, the likes of which hasn't been seen since the forgettable boy-band craze of the '90s.

But are these sites destined for the lasting greatness that eluded their all-male musical counterparts or is the group-buying craze headed for the proverbial online bargain bin?

Last December, when Groupon rejected a reported US$6 billion offer from Google, it served as an apparent declaration of war to all and sundry to battle it out for business deals and online buyers.

Recently, industry titans Google (via Gmail) and Facebook have jumped in on the act, and there are countless other major players offering their own flavour of the buying service.

For the uninitiated, group-buying is essentially based on small businesses providing discounted products and services when a specific number of people agree to purchase the deal. These are offered as coupons on a website that usually takes a cut of the total deals sold or a pre-agreed amount.

Closer to home, the decision by Yahoo!7 to splash out AU$40 million to buy Spreets sounded the starting gun for a mini-boom, which was followed by the likes of James Packer (Deals Direct), Harvey Norman (Harvey Norman Big Buys), NineMSN (Cudo), Groupon (Stardeals) and countless others to throw their hat in the ring.

The local tech sector hasn't enjoyed this level of interest from mainstream investors since the scramble for telco properties during the dotcom boom, and we all know how that ended.

But if you look beyond the fantastic number of dollars bestowed on the various players, there are concerns about the fundamental premise on which the platform exists.

Group-buying has been touted as a way for businesses to quickly and easily increase patronage and brand awareness.

But this comes at the expense of the small businesses, which lose money by offering services below-cost. Sometimes this scales out of control as popular deals attract more buyers and compounds the losses.

More importantly, there have been some criticisms that it actually does long-term damage for their brand and operations.

A study of 150 American businesses that ran Groupon promotions showed that less than half would use the site again, according to a Harvard Business Review blog by Rice University professor Utpal M Dholakia.

The study surveyed 150 businesses that ran Groupon promotions between June 2009 and August 2010, he said, with 42 per cent saying that they would not run a Groupon promotion again.

"Not surprisingly, repeat-purchase rates at full price were also low — just 13 per cent — for these businesses," he said.

"Their main reasons were that a significant proportion of Groupon redeemers are extremely price-sensitive, barely spending beyond a discounted product's face value," Dohlakia said.

This is a nice way of saying that the deals only attract cheapskates with no intention of buying from the business once they're required to pay full price.

Where does this leave the business?

Another retail blog has compiled a lengthy study as to why the group-buying model is bad for small business and concluded that:

• short-term gains will cause irreparable long-term damage;
• the idea that offering coupons or price-matching lowers your ability to take risks;
• the company being promoted and remembered is Groupon — not the small business; and
• businesses who relied on "couponing", "Grouponing" and discounting are training their customers to wait for another coupon before buying again.

A counter-argument was put forward by small business owner Jay Goltz, who said that businesses should treat group-buying as an advertising opportunity.

"Instead of writing a cheque for an ad, you are choosing to lose money on sales," Goltz said.

He even developed a formula for businesses to understand the financial costs involved, but I'd question whether someone under the daily pressures of running a small business has the time or resources to change their operations to accommodate this.

Unless websites start to offer this kind of advice and services, it's hard to see how they can survive into the future.

There have been some very impressive efforts by the local start-up industry to cash in on the craze, and they are obviously responding to the significant interest from consumers looking for good deals.

It would be unrealistic to presume an exponential growth in the number of businesses signing on to provide services at a loss, and presume that there will be a corresponding increase in the number of cheap customers lining up to buy discounted services as a one-off.

Questions about the fundamental benefit for businesses mean that there are serious concerns for the future of the space and the number of competitors that it can sustain.

Tell us about your experience purchasing from group-buying sites.