Recent research conducted by Professor Utpal M. Dholakia from Rice University contains facts that are not very pleasant form currently booming group buying industry:
- just a bit more than half (55.5%) of businesses recorded a profit after group buying promotion, more than quarter (26.5%) made losses and the rest broke even
- less than half of businesses that ran group buying promotion are going to do it in the future;
- almost 3/4 of merchants have no loyalty to group deal provider and ready to switch
So the conclusion that the researchers made is not very positive for group buying industry especially for websites that provide deals: the little loyalty, low rate of interest to repeat purchase from merchants and increasing competition will lead to the erosion of the current healthy margin and make the life of group deals providers harder.
The research collected data from 324 US businesses operating in 23 markets that used group buying promotion in 2009-2011.
Other interesting findings from the research:
- over 80% of deal users were new customers, however just around 20% were converted to repeat customers and 36% spent beyond deal’s face values;
- to make the deal profitable merchants should use higher face value, lower discount, limit the maximum number of deals and list shorter redemption period. In addition appeared that item based deals are more profitable than ‘dollar’ based deals;
- daily deals worked best for health and services and special events industries (over 70% of merchants reported profit). Two most popular categories of businesses – restaurants and spas experienced much lower success rate (43.6% and 53.7%) and only 53.7% of spas and 41.5% of restaurants are going to use daily deals in the future;
- businesses used 23.5% of their marketing budget for group buying promotions at expenses of more traditional media such as Yellow pages, print and direct mail
If you are working in the group buying industry or considering to run daily deal campaign it’s highly recommended to read the full research, it’s available at Professor Dholakia web page: http://www.ruf.rice.edu/~dholakia/
3 Replies to “Group buying industry future looks not so cloudless”
I’m not quite sure I agree with the conclusions of the report and your opinion that the future is not very pleasant based on these survey results.
From a business perspective I’m sure these numbers actually stack up really well compared with other forms of advertising.
The report concludes that 20% become returning full price customers – surely this must be a win given that around 75% of business reported that it didn’t cost them money and 80% of deal users were new customers. For me this is wow – what an opportunity!
I agree that participating businesses need to be clever and manage their offers and relationship with the group buying companies (GBC) but if they do they can conduct an advertising program that costs them nothing and delivers new full paying customers.
For me one of the contraints that the GBC’s will have is that they really only have one offer per day hence 365 deals per year max (yes there are side offers etc but it is the daily deal that is the main offer) To say that they will have problems fulfilling this I think is wrong. That is 365 businesses per year and with the resources these companies have this should be easily achievable. There will just be a natural level reached to determine an area size depending on the demographics, business numbers/makeup and amount/strength of competitors.
However, I believe the main issue with group buying will be future apathy and over saturation from the consumers point of view. I think aggregators will become more prevalent and the industry will have to adopt to a more pull than push approach. This is where networks such as Facebook may suddenly take the upper hand.
One final thought, I find it strange that the industry has adopted the guise of ‘Group Buying’ and they have the notion that the discounts come from the effects of the group. For me this is just nonsense and is purely a marketing gimmick.
IMO, group buying websites used right indeed can benefit the business. Issue that not all small businesses have skills, knowledge and capacity to run their group campaign right, that’s why half of them are not intended to repeat group buying campaign again.
Next issue that low barriers to enter lead to increasing number of group buying deals providers.
Taking in account these 2 factors and the low loyalty this will lead to more power for merchants and decrease of the margin for daily deals websites.
I agree with your point about consumer apathy who are overwhelmed by number of deals available and just gave up to check all this newsletters regularly.
It will be interesting to see how this industry develops.
Alex, as I wrote on FlyingSolo in response to your comment, I think the industry is ‘finding its feet’. A lot of the figures you quoted are likely to improve as businesses work out that deals aren’t for everyone.
We’ve written a comprehensive guide to running a deal here: http://thedealer.com.au/deals-blog/commentary/should-you-run-a-daily-deal-for-your-business/
I’d be keen to hear your feedback on it.