Business Friday – Group purchasing destroys markets

Group purchasing destroys markets
or also called why i hate group purchasing sites so much and think they should not exist.

I guess by now, everyone know what kind of sites I’m talking about. If not, heres a short description: These sites ask companies to offer their products or services at a discount rate for a one time deal, with the condition they will get at least a certain amount of purchases. Say the company would give their service at a 50% discount rate, but only if they get at least 20 purchases.
The group purchasing site now offers this deal to their “followers” and if 20 sales are reached, the deal is active and everyone benefits of it. Everyone can buy the service/product at a discount rate. If the deal does not go active, nothing happens.
Of course people follow these sites avidly. Getting stuff at less than 50% of what their original price is, must be great.

Companies offer this great discounts because of two reasons. First for their marketing campaigns, group purchase sites get to a lot of people, and this will help companies to “get their image out there”. Their name and deal will be seen and read by a lot of potential customer. Secondly they do it in the hope some of these customers will be returning to buy some more product, lets call this “acquiring some loyal customers”.

Up to this point everything is good. Companies get words out and get customers, sites get some money out of the deal and the consumers purchase at a discount.
Now here whats bad with these sites. Heres the problem: When the market is stable, everyone has their prices, and customers choose freely from whom they want to buy, sometime they prefer a better price, sometimes they choose higher quality. Now if one company sacrifices a lot of their gain to get to their potential customers, and this is an isolated event, it OK, but what happens when all companies do this? A price war starts. Everyone tries to offer their product at the lowest possible price so customers will choose them. Every company gets “their name out there” the same way and the “loyal customer” disappears and all customers are turned into “mercenaries” of whichever company has the lowest price tag. Customers benefit, but for how long?
Small companies can hold this competition up just for so long, after which they will have to close down. Bigger companies now will have the chance to get the whole market back, and charge the prices they want.

All in all, i see group purchasing sites as catalysts of an undesired market reaction, in which customers betray their regular purchasing principles to obey the price tag and by doing so, leaving no choice to the companies to enter a price war.

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Posted on July 29, 2011, in General, Ideas and concepts and tagged , , , , , , , , . Bookmark the permalink. 5 Comments.

  1. I totally agree…in theory.

    On the other side – and as you know I could follow such a case very closely – it is a great opportunity for small businesses to start out and gain a first batch of clients. Its up to them where they go from there and how they convert them to permanent clients and not one time price hunters.

    And the latter one is the real economical risk for startups: Make sure you can afford to serve 80% of those clients that come through group buys sites for free. Those are the type of clients who will not stay. Disqualify them early and focus on the 20% real clients. If you miss that – it can become your most expensive marketing effort ever.

    • A real discount site should not accept startups, they just take them here because they are trying to win over an already flooded market.
      I could actually discuss this being even a viable marketing inversion for a small company, its cost implications and risks makes it not suitable in most cases.

  2. Intresting thoughts… Although at some points I do disagree I understand clearly what you mean.

    But lets put it this way… everyone likes to save 50% on whatever they buy after all, we are always complainning that we don’t have enough money (to satiate our capitalist needs) and this certainly helps us increase our “buying power”.

    On the other hand, this works well when for instance you are buying things YOU NEED and not just because they are cheap. As an example… I don’t see buying sushi as a NEED (even those who claim to be addicted to it must confess that they can live without eating raw fish!) BUT if on the other hand I can buy some clothes, shoes or why not a car! at a discount it’ll certainly increase my life’s quality!

    Prices are always at war, this happens a lot with CHINESE products no matter the item you choose. They take advantage of the fact that they sell a lot of units with reduced margins while their competitors prefer to have big margins and sell just a few units. Customer then chooses price over quality (because they want to make the best out of their money)

    These anyway are in my humble opinion signs that economic models are badly desinged.
    (based that I know shi** about economics, except for what I see & try to decode from newspapers and other sources)

    It cannot be possible & right that an apple today costs lets say 1/4 dollar and THE EXACT SAME APPLE would have costed 5 cents 20 years ago. The apple didn’t evolve, changed it packing,etc. Demand makes its value go up!!!

    Anyways… these got a bit longer than I expected it to be hehehe. Lets just say I think these things can have a negative impact, but on the other hand it does force people to reduce their margins and customers “win”.

    Keep up the good work sir!

    • Of course the customer wins in the short term…. but surly not in the long run.
      When you need stuff and there happens to be a deal of it…. thats good, no doubt.
      The topic of the post was actually to look at it in a broad market sense, not just from the customers view.
      Another topic i didnt even got into was WHICH products should be on theese sites.
      I perfectly understand a hotel offering theese kinds of deals in their low season, a movie theater in their wee hours to fill the empty spaces that would go to waste if not sold.
      Now products with low differentiation factor, like pizzas or sushi, should definitely not use these sites to promote their products, because that will create the price war.

  3. and about the Chinese, their business model is built on scale production, not comparable to price war.

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