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.