Consumer Psychology for a Digital Age

How Brands & Retailers Can Profit from the Social Commerce Group-Buy Trend

As investors pour millions into social commerce sites of the Group-Buy persuasion, should brands and retailers be looking to add Group-Buy functionality to their sites?

If investment activity is an indication of market opportunity, then adding Group-Buy features to e-commerce sites – a la Dell Swarm – is a no-brainer.  18-month-old-and-already-profitable startup Groupon has just received $135m investment from Facebook backers DST, valuing it at $1.2bn (projected sales $350m this year). And last week the US Group-Buy challenger site LivingSocial received a further $14m funding from a group of investors led by Lightspeed Ventures (taking total funding this year to $44m).  Meanwhile, German Group-Buy site, CityDeal recently received a further $5m Samwer brothers funding, and event shopping giant Gilt has just invested in creating its own local Group-Buy brand – Gilt City.

All this while startups are investing time and effort in new and creative variations of the Group-Buy local-deal-a-day model (70+ sites in US, 15+ in Germany and counting); focusing on particular niches (e.g. restaurants – BlackboardEats, and Feastery), deals with local newspapers, Group-Buy deal aggregators (e.g. Yipit) and imaginative deal tweaks such as making the size of the discount dependent on the number of people signing up, and special private VIP deals for premium members (HomeRun avalanche deals and ‘private reserve’).

Adding Group-Buy functionality also makes sense from a consumer trends perspective.  Group-Buy is a novel form of local advertising (‘Woot Local’) that builds on three big trends (in addition to the obvious social media trend) – the real-time-web, the location-based web (80% of disposable income is spent within 5 miles of home), and O2S (online to store), the trend that has Google fixated. The net result? A surge in popularity of Group-Buy traffic.

So how could online retailers go about implementing Group-Buy on their sites?  Well most obviously, they could either participate by offering deals with these sites, or deploy Group-Buy widgets on their own sites from social commerce solution providers such as Twongo and eWinWin.

Another approach for profiting from the social commerce group-buy trend could be to experiment with the Group-Buy blueprint proposed this week by Jim Tobin, president of social media agency Ignite.  Although Tobin sees these ideas more as an opportunity for marketplace sites looking to seize social commerce opportunities, they could easily be adapted and deployed as ‘brand butler‘ services by brands and retailers.

Phase I: Group Facilitation – Add a simple forum to your site, and invite customers to connect and coalesce into groups looking for a particular product and then come as a group to you ask for a discount.  If you are a brand, consider setting up a group-buy forum for category-related non-competitive products

Phase II: Group Negotiation – Now invite suppliers and partners to pitch for the business of the groups as they emerge

Phase III: Procurement and Purchasing – Next move from simply facilitating deals to taking payment for them (benefits of negative working capital)

Phase IV: Direct Distribution – Begin sourcing products directly from manufacturers to secure better deals for customer groups

Perhaps you’ll decide that Group-Buy opportunities are not for you.  Nevertheless Group-Buy is at the epicenter of social commerce right now – so surely that at least merits a discussion with your colleagues and agencies?

Comments (13):

  1. Jeff Molander

    April 30, 2010 at 08:14

    Paul…
    But I’m afraid this doesn’t support your premise — profit. How does this get used in a way that creates profit? Revenue maybe but profit? You seem to be suggesting “how can it not? look at all this VC!”

    Thanks for considering.

    Reply
  2. Paul Marsden

    April 30, 2010 at 08:18

    Hi Jeff, thanks for the comment – I agree investment does not equal profit, but it does open the question of how brands could profit from a what is clearly a big market trend – and Groupon is generating profits, so it can be done.

    Reply
  3. Kobie Fuller

    April 30, 2010 at 12:28

    Though we at OpenView Venture Partners have not invested in the group-buy trend yet, the economics for the retailer/brand seem to work quite well. While profit on the initial sale may be low (or zero) its all about the customer acquisition. Get a critical mass of customers to buy your product/service so that you at least breakeven (and with no work on your part) and then hope to make out long term from the customer retention and potential word of mouth. Not bad…

    Reply
  4. how

    May 5, 2010 at 23:07

    Well you did promise to discuss HOW to profit not how to open the door, Paul.

    Reply
  5. Jeff Molander

    May 10, 2010 at 14:06

    Hi, Paul…
    Indeed, but your promise was to explain how in this article. I’m not trying to nag you (I’m a loyal reader and appreciate your efforts) just pointing it out.

    And I realize that Groupon et al are profiting — wildly. But let’s face it. Retailing and Groupon’s model? They have not only very different buyer dynamics but profit margins that could not be any further apart from each other. So I’m not so sure that the success of vendors is any indicator whatsoever of the opportunity for retailers. This is not to say there is none… there is IMO. We seem to agree on that point but not on how to get there.

    Reply
  6. Jeff Molander

    May 10, 2010 at 14:15

    Sorry — one other point re: Groupon’s business model.

    Groupon is today’s Restaurant.com. We’ve seen this before and the market will soon reject Groupon’s main value proposition: Valuable new customers. Retailers who look beyond foot-traffic will realize (over time) that at best Groupon represents an opportunity to cover rent — not boost or even significantly contribute to profit.

    But not before VC’s make their money and founders exit. As Restaurant.com learned years ago in its early stages, local merchants had limited appetite for what amounts to a new spin on the “loss leader” approach to customer acquisition. And here’s why: Customers become conditioned to expect deals that retailers cannot actually afford to give. Bottom line: New customers (that the retailer can actually make a profit from) don’t actually appear.

    I’m surprised that we’re not talking more about what we already know about these kinds of businesses.

    Reply
  7. Paul Marsden

    May 10, 2010 at 14:22

    Hi Jeff, thanks for comment, and agreed that Groupon is a peculiar retail model – selling online vouchers for offline purchases.

    But I do think the 4 Phase approach offers an approach for ‘how’ retailers could profit from Group-Buy; For example, in phase 1 retailers could profit from Group-Buy by adding a group buy forum thread/section that could generate more sales by allowing customers to club together and buy in bulk… Then linking this into inventory management based on group-buy demand… etc, etc (phases II-IV).

    IMO the big idea here is “retailer-as-broker”. Dell with their Dell Swarm group-buy feature offered an early version of how this could be done… Not perfect by any means, and there’s lots of room for improvement and innovation. Nevertheless, I think online shopping events with dynamic pricing based on demand levels will become increasingly compelling component of e-commerce…

    Reply
  8. Jeff Molander

    May 11, 2010 at 11:03

    Hi, Paul…
    Very interesting thoughts. I agree, could happen and could benefit retailers. But I’m not sure how much. And I’m quite certain that group buying as you describe it is about as palatable as mobile shopping comparison. That’s just my opinion.

    Re: retailer-as-broker — ok. I really like that and Dell is a great example. But they’re a manufacturer right!?

    Oh, we agree — it’s compelling. That is nearly indisputable. But for retailers to own this and call their own… I’m just not convinced. But I’d enjoy being swayed.

    Reply

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