I’ve tried to blog about group-buying a few times, but really struggle to get my head round it. But the more thought I give, the more I find myself siding with the bubble camp. Although I have to admit, this is largely based on gut instinct.
My problem with group-buying is that – despite the hype around ‘collaborative consumption’ – it actually offers nothing new for business customers. For end-consumers it’s a different story, in that consumers get access to great deals (sometimes…), but for small businesses I don’t see anything groundbreaking. And to be honest, I think a lot of the hype around Groupon etc are driven by people with little understanding of marketing.
Essentially, group-buying offers a way of aggregating and distributing loss-leader offers to customers. A loss-leader is a “product sold at a low price (at cost or below cost) to stimulate other profitable sales” [link] and is nothing new in business marketing. Essentially, the business publicises a low-cost offer on a single product in order to drive footfall and hopefully increased future custom, or increased basket size (or both).
A business could get the same effect from an ad in their local newspaper saying that the first 200 people get 50% off. Of course, the Group-buying offer has some superficially appealing benefits:  you get much wider distribution,  there’s a reduced risk (as the offer only triggers if a certain threshold of people take up the offer), and  there’s increased accountability (as you know exactly the number of people driven by the offer). But these are also the problems …
 While you get wider distribution, I suspect you also get reduced quality of customers. While an ad in a newspaper would deliver less people, if it was an ad for a restaurant in the Food section for instance, the people who were delivered would likely have a high propensity for return business. Groupon etc, as many have noted, likely deliver a lot more people, but they tend to be habitual bargain-hunters rather than likely future loyal customers.
 The reduced risk in the pay-for-performance element is probably what attracts a lot of interest in group-buying. A lot of small businesses have likely spent thousands of dollars on billboards/local TV/local newspaper/radio ads with little or no discernible effect, so the idea of a marketing spend that only incurs when you reach a threshold is incredible.
But there’s a flipside to this. Firstly, you may end up with far more customers than you can deal with, which if they’re all redeeming an offer at or below cost, can be a real problem for a small business. Secondly, group-buying sites takes a big slice of the revenues, which they wouldn’t from a more traditional ad campaign. And thirdly, the performance you pay for is in redemptions and footfall, and this does not necessarily translate to future custom.
 The accountability of group-buying is likely another big attraction for local businesses, who are used to paying for billboards that bring in an uncertain number of customers. But this is an illusion, similar to internet advertising – yes, we know how many people saw that banner ad, and we don’t know how many people watched the TV ad. But what we don’t know is the real question of what future profitability is driven by those impressions. That’s a far bigger, harder question to answer. So in group-buying’s case, while we may know exactly how many people walked in the door as a result of the offer, what we don’t know is the worth of those people.
While everyone’s focussed on the tremendous consumer benefits of the model, few people are talking about the benefits for group-buying’s customers – the small businesses. I think this is as good as it’s going to get for group-buying. At the moment they’ve got a long list of businesses waiting to trial group-buying, and big salesforces churning through the demand. They’re making real money. But the key metric I want to see is repeat business from small businesses, because if they don’t have that, sooner or later they’ll stop making real money.