The Growth Factor

This story originally appeared here in the February issue of Business Review Australia magazine.

Story by Allie Schratz

A blogger for the UK-based communications website Corporate Eye questioned back in 2009 whether the recent worldwide phenomenon of group buying was inspired by tuangou. An increasingly popular practice in China, tuangou, or ‘team buying,’ involves a group of people haggling with a shop owner to lower the price of their merchandise. Once a lowered price is agreed upon, everyone in the group receives the discount.

If this sounds like a familiar concept, chances are you’ve stumbled upon one of the online versions of tuangou.

Groupon, the unexpectedly successful Chicago-based website that sprouted as a side project of another venture, was the first company to introduce group buying to the world via a daily online deal. Since its inception in 2008, the deal giant has expanded its ‘daily deal’ business model across 45 countries (including Australia after a web domain snafu in 2010.)

There are several parallels between tuangou and group buying websites such as Groupon, which offers a product or service from a local business at a 50-90 per cent discount. Deals are time sensitive – most are only available for purchase within a 24-hour period – and must generate a specific amount of interest in order for everyone to get the deal.

The number of websites with group buying deals has skyrocketed over the past few years – in Australia alone, there are upwards of 70 – but their deal offerings demonstrate a difference in buying cultures across borders.

AUSTRALIAN BUYING CULTURE

For Australian consumers, these deals offer the chance to experience something new.

“Customers are always going to the same bars and restaurants because it’s too much of a risk to try new things,” said Dean McEvoy, CEO of Australia’s first group buying site, Spreets. “Spreets de-risks that; it inspires people to go out and try new, interesting things in their city at a sampled, discounted price.”

These “new experiences” might include pricey activities such as skydiving, a weekend getaway, or getting SCUBA certified, or everyday opportunities such as a haircut, a cooking class, or a car wash. While the discount is certainly a pull for purchasers, time spent overseas helped McEvoy discover the main difference between the Australian and US buying markets.

“Australian [deal] price points are higher and growing rapidly, attracting users with a higher disposable income. For Australian users, group buying is really about trying new things, whereas Americans are more concerned with the savings and discounts that the deals offer,” said McEvoy.

The company’s acquisition by Yahoo!7 in January 2011 has allowed Spreets to target more relevant deals to relevant consumers using location, consumer behaviour and user interests to determine appropriate deals. These deals, known as “pull deals,” encourage customers to check out activities closer to their home or indicated interests, rather than the “push deals,” which are marketed to all subscribers.

MERCHANT CARE

Of course, not all group buying deals have been deemed ‘successful’ ventures for businesses.

“The big thing we’ve found [is that] retailers have been overwhelmed with people taking up their offer [and] it’s not as profitable as they would have hoped,” said Russell Zimmerman, Executive Director of the Australian Retailers Association.

One of the most infamous examples of a group buying backfire happened in the UK, where Need a Cake bakery offered a dozen cupcakes at a 75 per cent discount on Groupon and received an influx of 8,500 voucher buyers. Between the discount and the number of extra workers who had to be hired on to help handle the workload, owner Rachel Brown has called the marketing scheme “my worst ever business decision.”

To avoid repeating that mistake, Spreets works closely with the merchants featured on the website to ensure they are prepared for the promotion and increase in business. In order to guarantee that both the business and consumer will be happy with the deal, Spreets consultants will determine a ‘cap’ on the number of deals available. This way, the merchant is able to offer a realistic, deliverable deal that won’t threaten the business’ profitability and one that will deliver a better experience to new customers.

“Spreets has developed strict criteria to determine the suitability of a business to group buying and we ensure the business meets these criteria in order to proceed with a deal,” said McEvoy.

In addition, Spreets’ consultants offer advice on up-selling and cross selling in order to help make the promotion more profitable for the business.

THE FUTURE OF GROUP BUYING

The group buying movement has grown with immense force all around the world, but just how sustainable is this growth? Will group buying keep consumers further from the shops during a time when their business is most needed?

“It’s fair to say that [group buying] is part of the global retailing phenomenon, [but] it’s not a threat to retail; it’s an opportunity for retailers to make an adjunct to their business,” said Zimmerman.

“Consumers are, will, and want to conduct business online. In terms of group buying sites, if that’s where your customers are, it’s going to be part of the consideration of a retailer’s business model,” Zimmerman continued. “It works particularly well for start-up retailers who want to get their name out there.

“A lot of retailers are looking at it to see if they can improve their business by getting onto a group buying site.”