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Is Group Buying Sustainable?

3p is proud to partner with the Presidio Graduate School’s Managerial Marketing course on a blogging series about “sustainable marketing.” This post is part of that series. To follow along, please click here.

By Somsak Boonkam

90 percent off for a skydiving jump? 75 percent off for a candle-lit dinner for two? It’s easier than ever before for consumers to find good deals offered by local merchants, restaurants, and businesses. Collective or group-buying sites such as Groupon, LivingSocial, and Google Offers provide us with hard-to-pass-up deals and discounts from their business partners. These sites have tools that allow us to choose what we want to buy, plan activities, and share them with friends on Facebook or via email.

So where’s the catch? There is one potential issue surrounding this new industry: whether the business model can prosper and sustain itself in the long run.

Let’s take Groupon, the first, the biggest and the fastest-growing player in group-buying as an example: Groupon helps local businesses to promote their products and market themselves with no upfront cost. Offering deals via Groupon can greatly increase visibility of a business. On the surface, Groupon creates a win-win-win solution for all main stakeholders: customers get great deals, merchants and businesses gain recognition and customers, and Groupon gets a percentage of revenue from the deals. Businesses actually compete to be featured on Groupon by cranking out outrageous deals — only 10 percent of those who apply get picked by the company. While in the short term these deals might not even result in profits for the small business, in the long term this could be their only chance of going big.

However, whether this group-buying model is a sustainable business is still a question.  Some experts say that the model cannot be sustainable if the local businesses don't get paid to be featured, there is no guarantee that those customers will return for another purchase, all the while the company is providing products and services at or below cost. Even worse, the group-buying model might forever spoil the consumers with insane discounts and devalue merchants’ brands and profitability. In terms of growth, once all regions in the world are saturated with these deals, group-buying businesses will get more revenue only if they can put more deals out on the website. From a consumer perspective, this could be a huge mess — the more offers, the more difficult it is for customers to find the deal that they are looking for.

How can this group buying industry be more sustainable? One thing that Groupon and its competitors could do is to shift the focus from purely bringing in new customers to incentivizing consumer loyalty — so that good businesses don’t go down after the deal is gone. Could there be simple and effective programs that encourage and reward loyal customers (similar to what Chatterfly, and Punchd mobile rewards applications are doing)? Are there any other strategies that group-buying companies could employ to make their business model more sustainable?  What does the future of this industry look like to you?