5 reasons group-buying is bad for business

We’ve all seen them – group-buying websites offering deals that last for just 24hrs. The adverts scream 40-75% off, sometimes even more. But what exactly is it doing for your business and your clients?

Back in June 2011, NZ site 1-dayout pulled out of the market. They slammed the door firmly shut on the voucher business model and focussed instead on selling goods at a heavy discount through their other 1-day brands. They came right out and said that voucher deals are bad for customers and bad for the business offering the deal. They shook up the industry for which you have to give them respect.

In fact, Race Louden, sales and marketing directors of 1-day was quoted on Stuff as saying that the deals often attracted “the wrong kind” of customer to a business, had a detrimental effect on industry-wide pricing, and service suppliers were often not prepared for the sudden influx of customers as the result of a deal.

I’m not a fan and I’d find it very hard to recommend the process to a client. Here’s why:

1. Group-buying makes existing clients grumpy

Race Louden at 1-day gives the example of an individual massage provider who sold 500 vouchers for one hour intensive massages through the 1-dayout site. Underestimating the power of group-buying, the provider was totally overwhelmed and was unable to cope with the sudden influx of business. The constant bookings meant existing customers couldn’t be seen, and service was compromised. Race believes that this was a familiar situation.

Getting customers is one thing but keeping them is what builds a business.

2. People who find you through group-buying sites rarely come back for more

US-based Rice University School of Management reveal that just 1 in 5 will come back and purchase at the full price. And from the companies who sell through group buying websites, 82% say that repeat business is unsatisfactory according to another study by UK-based copywriting agency Cooper Murphy.

3. How do you make money?

You have to drop your prices drastically to get attention, then you hand over a chunk to the group-buying company. So hello turnover, bye bye profit. And if you don’t convert enough of those deal-hungry prospects you will have exhausted yourselves and stretched your business processes all for very little financial return.

I spoke to one businesswoman recently who was working round the clock to fulfil her voucher commitments and making very little money. Her business was new and she was delighted that she was getting such a high profile. But she was exhausted and knew that many would not come back to pay full price. In my mind the financial benefits just did not stack up and she was sending all the wrong signals about her brand to the market.

4. We’re all looking over your shoulder for the next group-buying deal

Do it once and it will be expected that there will be more discounting to come. If people want to come back for more, they’ll hang on for your next cut-price deal or one from your competitors. Group buying fails to nurture customer loyalty.

5. It labels your business as a discounter

Back to my encounter with the businesswoman. She was actually a very good saleswoman and I think she could do well. But I think she’ll have to drop her non-discounted prices significantly because the vast majority of her clients have arrived through the discount deal. I just don’t think that they will be prepared to pay for her services at 40% above the discounted price. The voucher scheme will dictate the shape of her business.

And Race is quite clear on the damage it can do to businesses and well as particular industries. In his article on Stoppress, he gave the example of the canvas photo printing businesses. Race explains “Customers can regularly find these deals online at a discount, which has meant the industry as a whole is finding it a challenging task to demand the higher margins they once enjoyed, as customers come to expect deals. Based on our feedback, we have heard this same pattern resonate across other business categories that have used group-buying.”

I respect Race and the 1-dayout team for pulling the plug. I think products discounted for one day are fine – they provide people with a strong reason to buy. But unless your business can cope with a big influx of people and you are confident you can convert enough of the deal-hungry buyers into repeat customers, stay well-away from voucher sites. Because you run the real risk of cheapening your brand, driving yourself into the ground and making very little money when using group-buying.