[tweetmeme]There’s so much discussion about GroupOn, Living Social and other group buying services that I thought we’d discuss it in some detail here and then forge a plan on how to implement your very own alternative.
Group Buying Business Model
Whoever came up with this first was pretty brilliant. In essence this service acts as a broker, or an agent if you will. And for their service, they collect a tidy sum or percentage of sales. So, let’s have a look at the group buying business model. In its simplest form, there are three parts to it: The Broker, The Supplier and The Customer.
The Broker -> This would be GroupOn, or another one of hundreds of recently cloned services. The broker is acting as a bridge between the consumer and a supplier. It’s role is two sided. One, to attract and retain as many people as possible with offers of large discounts on things they want. And the other, to offer access to this massive bank of potential customers to The Supplier under the stipulation they offer a hefty discount (most of these require 50% – 75% discounts).
The Broker then reaches an agreement with The Supplier and builds an outreach campaign (most of the time it constitutes of an e-mail blast and a website announcement). Depending on the service, they will most often make their cut on the transaction itself, much like PayPal.
The reason some of these are so profitable is because of the pure volume of sales. Just think… if you managed to build a bank of 100,000 “deal subscribers”, and 10% of them act on a deal on a hour’s worth of massage services offered at a 60% discount. Let’s assume that massage costs $70, and that GroupOn keeps 5%:
- 10% of 100,000 = 10,000 purchases
- $70 X 5% = $3.50
- Total profit would then be: $35,000 (that’s just ONE offer, for ONE day)
This is a very simplistic way to look at these services and revenues would be affected by the number of subscribers, price point of the product or service being offered, percentage point of fees, number of cities the offer is being made and so forth. No wonder everyone and their dog is trying to get into the game. Having built online communities, my thoughts are that the one service with most subscribers who manages to foster and respect their buying base… will win.
Now that we have that figured out, let’s have a look at what’s in it for you.
Will this work for my business?
As a supplier, this all sounds pretty good! Can you imagine booking 10,000 massage appointments. Your business would be booked solid for a VERY long time. But let’s explore the darker side of this phenomenon.
You sold 10,000 units, BUT at a deep discount… with one of two precedents. ONE, that some of these new customers will stick around after the initial contact or TWO, that you can make up the difference in profitability just by the pure volume of sales. This may work for some businesses, but one issue I can see happening is that you’d be now operating on razor thin margins (hopefully) and that you’d see severe attrition of buyers beyond the initial offer. Why? Well because majority of buyers have no connection to you, your business or your brand. It was a purchasing decision based on price point. And if you’ve been in business long enough you know that equals death on a long run.
From a sales psychology perspective… once you’ve anchored your price point low… it’s quite the battle to ramp it back up because now your customers have a perceived value of what you do or offer. And perception is reality… a reality that may be very hard to change.
That being said, IF you are able to formulate a deal whereby you can offer a deep discount and STILL make a decent margin (All the Power to you!), then by all means this could be a very lucrative endeavor to explore. For the rest of us though… let’s think about another way.
How do I build my own GroupOn?
The solution I’m about to offer you takes time and is not a quick-fix solution to slumping sales, but rather a solid long-term growth strategy that leverages technology and social media.
First off, you should realize that there are already people out there who would LOVE to get their hands on your product / service (with the assumption that you don’t build sh*tty products). Next, you should consider treating your customers like loving fans and not just transactions waiting to happen. With those stipulations in place, let’s look at some ideas:
Reach them – for a budding business, this is often the hardest part, but for you veterans… there’s no excuse. Do you enable your customers to connect with your brand? Do you listen to what customers are saying about you or your industry? You have the opportunity to build a super simple listening post just by setting up a search on Twitter that seeks relevant keywords. That alone may expose you to a whole new world of people to connect with. Just a few months ago, I had a (pretty expensive) mountainbike stolen out of my garage and when the rage subsided I tweeted about it and mentioned that I will now be looking for a replacement. Within minutes I received a reply from Speed Theory, a local bicycle shop with a kind word and an offer to get me set up on a new bike that would fit within my budget. Never having heard of them before, that shop is now in my consideration set when it comes time to make a purchase. This is a small and personal example, but smart businesses are taking this approach to reaching out all across the board: software companies, computer manufacturers, accounting firms and so forth. So YES you can reach potential new customers… but ARE YOU?
Love them – and you will receive love right back. I was recently at a WestJet Christmas party and listened to a truly moving story about a couple racing to beat the clock from Calgary to Vancouver to see their daughter in the hospital where her organs very failing rapidly and she was on life support. While they were driving to the airport with no clear plan, they called everyone and everybody to get on the next possible flight. A WestJet call center representative who answered one of those calls went out of her way to HOLD the next plane on its way to Vancouver and even get in touch with gate attendants to make sure the family was quickly ushered to the plane as soon as they got to the airport. There is more to the story, but needless to say, WestJet now has a fan for life. A fan who has a social circle of their own… and a fan who just may be able to influence the buying decision of the people within their social circle. What is your Customer Experience like?
Reward them – Now that you have contact… and a customer has experienced your brand and your service, you have a building block of a fan. And let’s just say that you have more then one (I know… reaching here), how would you support their decision to stay with you? Well, one of those ways would be to reward their loyalty with perhaps offering a discount (oh yeah, there is a method to my madness). By offering the discount only to those you’ve connected with (e-mail database, Facebook page, Twitter account… etc). Reason would be two fold. ONE, this unexpected reward that is of substantial value may be something for them to further their relationship with you and TWO, they just may tell some of their social circle about it… and there’s your organic growth. If you’re willing to sacrifice profits to GroupOn, why wouldn’t you consider doing something as nice for your own audience (fans, followers, past customers, etc)?
There you have it… a long-term strategy sure to bring steady revenue growth and new customers that will love you for being you… Not just the cheapest on the block (man.. that’s an ugly, ugly connotation).
Have yourself a wonderful day and if you enjoyed the article, please share it on Twitter or Facebook.
Ernest // @ebarbaric
EDIT: Due to the popularity of this article and the e-mail requests, I am developing a downloadable package that includes the business model, necessary files, worksheets and document support in video and PDF format, that will enable you to build your very own GroupOn alternative. Please stay tuned as the package is being developed.