New group buying sites are springing up every day to compete with the largest and most profitable group buying business known as Groupon. Groupon harnesses the collective buying power of its large user base to offer huge discounts on local services and products via their daily email delivered group buying deals. Groupon has a huge lead on most of the competitors but with nearly 100 group buying websites already launched, one has to wonder if Groupon can maintain its dominance indefinitely. As the group buying business model evolves, merchant-friendly add-on platforms may be born to serve the needs of local business owners and eliminate third-party group buying service providers. It’s also possible that an alternative collective buying solution may emerge to ensure that any revenue generated locally remains within the community. Regardless, given the high expenses and disadvantages to using services like Groupon, it may be in a merchant’s best interest to spend their hard earned money promoting their business elsewhere. We examine all of these possible outcomes herein and consider the costs incurred by promoting a business using popular collective buying sites like Groupon.
Unfortunately for Groupon, group buying websites are relatively easy and inexpensive to create and maintain. All you need are some willing merchants that want to gain new customers, a email newsletter to notify readers of new daily deals, and a website for the customer to purchase the group coupon vouchers. It then becomes a simple matter of growing the subscriber list for your email newsletter to generate more sales for your clients. Incentives such as referral bonuses which are awarded for each new purchase encourages users to post the 50%-off deals elsewhere and share them with friends. The combined use of social media, killer deals, and incentivized traffic makes growing one’s newsletter subscriber list fairly easy.
With minimal barriers to entry, Groupon is dependent upon its brand and first-mover advantage to gain market share. Groupon is already present in most major U.S. cities and it just recently purchased MyCityDeals to become one of the largest group buying websites in Europe. Despite its staggering growth, there are numerous smaller markets throughout the U.S. and other countries that remain untapped which could easily be targeted by Groupon’s competitors. When you compare group buying sites versus Groupon, feature sets do not differ very much and competitors are quick to copy any new features that Groupon adds. It appears, however, that local publishers and media outlets such as newspapers, radio stations, television, community websites, local forums, city blogs, and other locally owned online organizations may have the upper hand against Groupon and its group buying competitors. That is, local publishers already possess the necessary subscribers that a group buying model requires should they decide to begin promoting local group buying deals independent of Groupon.
Does Groupon Hurt The Local Economy?
Groupon’s arrangement with merchants is pretty aggressive; it takes half of the voucher sales generated for each deal. With most deals offering 50% or more off the original price for a particular product or service, merchants are losing 75% of what they’d normally make for any given sale. The remaining 25% goes directly to Groupon which isn’t locally owned and that revenue doesn’t return to the local community. For example, if a business uses Groupon to promote a 50%-off sale offering $10 vouchers worth $20 in services, and 500 vouchers are sold, Groupon earns $2,500. That’s actually a low estimate for voucher sales which can be upwards of tens of thousands for major U.S. cities and we’re talking about just one deal out of a potential 365 (one deal per day) that’s offered each year by Groupon per city. Our assumptions of $2,500 in earnings per daily deal adds up to nearly $1 million dollars ($912,500) in revenue that’s removed from the local economy each year. That’s a huge amount of revenue considering the current U.S. economy and a near 10% unemployment rate. With that in mind, what’s to keep local merchants from boycotting Groupon given that it’s not a locally owned company? A boycott would most likely be ineffective but people seem to be more concerned than ever about keeping locally generated revenue within their own community. Moreover, merchants that are well aware of Groupon’s aggressive service fees may be more inclined to seek out other available options. Hence, could an alternative group buying model emerge to successfully addresses these concerns?
Groupon Versus Group Buying Platforms
An obvious alternative for local business owners that want to utilize the group buying model without incurring the high costs involved by using Groupon would be to integrate the group buying feature within their own website. This can be achieved by creating the merchant’s own group buying-like interface or utilizing a group buying platform that’s easily integrated within the business owner’s site. The cost of creating a group buying interface for one’s business may be too expensive for many small business owners and therefore a group buying platform might be the more attractive option. Indeed, group buying solutions like SyncFu have already emerged to address these specific needs for small business owners and it is logical to assume that we’ll see more of them in the future.
Groupon Versus A Local Merchant Cooperative
Perhaps an even greater threat to large group buying sites like Groupon is the non-profit group buying site that’s funded by local merchants interested in keeping more of the revenue within the local economy. A non-profit group buying cooperative business would not share the email addresses between merchants but it could be used collectively to promote local deals without incurring the huge expenses compared to a Groupon-like site. Perhaps the only costs for such a non-profit group buying site would be for the creation and maintenance of the website which could be shared between the local businesses that utilize it. Hence, instead of paying for advertising to promote your local company’s 50%-off sale, now you’d only need to pay a small listing fee or a reoccurring service fee to access the cooperative promotional tool.
In the future, it’s very likely we’ll see the profit margins for group buying sites shrink over time. Instead of charging merchants 50% of all voucher sales revenue, Groupon will be forced to lower their fees as the ever increasing list of group buying competitors continues to grow. As a result, group buying websites will have to reduce their own operating expenses and become more efficient in order to remain competitive in the market. Whether Groupon can effectively do this in light of their assumed large operating costs and the potential advantage local publishers seem to have is yet to be determined. One potentially greater threat to Groupon would be the entrance of Facebook into the collective buying market. If a Facebook versus Groupon scenario were to develop, it would be difficult for Groupon to remain competitive. The possibility also exists for Groupon to evolve such that it offers attractive alternative group buying solutions that counter the other group buying models and concerns about the impact on local economies outlined herein. Regardless, group buying will remain a win-win business model that should only improve over time for both local business owners and consumers.
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