Tipping Point: Consumers Save as Group Buying Services Go Mainstream

You know an idea has arrived when it draws loads of copycats and sparks an emerging ecosystem of products and services that extend the idea and turn it into a full-fledged marketplace. eBay did it with online auctions, and Facebook did it with social networking. (See also: Amazon, Yelp, Etsy, and Salesforce.com.) This is exactly what is now happening with group buying, the trend du jour in ecommerce led by big fish Groupon and its massive market valuation of over $1.3 billion based on revenues of less than $50 million (A valuation 20x annual revs is rich, even by dot-com standards). In fact, we could even call it a blossoming grouponomy.

For starters, there are a number of Groupon offer aggregators, led by Yipit. San Francisco and many other cities now have five or more group buying sites operating. In practice, this means five different emails each day. To date, the big group buying sites have chosen not to allow users to select preferences for offers, such as restaurants for foodies. That's because they don't want to slice their hard-won email lists into smaller chunks that will, conceivably, draw fewer offers.

Picking and Choosing

Personally, I'm not terribly interested in spa treatments or activities, which make up at least 10% of group buying offers. So that's why I use Yipit. The service lets me select specific interests and sends me only relevant group buying offers, eliminating email clutter and making my life easier. (I only check one email instead of five) This model will likely be replicated. I have no idea how they will monetize it, but that shouldn't be too hard -- the grouponomy is a lucrative niche.

Of course, there are a ton of niche sites popping up around different verticals. Blackboard Eats gives subscribers free codes for deals that can be redeemed for restaurant deals in San Francisco, New York and Los Angeles. BloomSpot focuses on boutique local offerings. Jetsetter is a highly curated high-end "private deals" group buying site written by top-tier travel writers. GreenBoxTop is a soon to launch San Francisco-based group buying company focused on offers from verified green businesses. There is even a beer specific group buying and deals site -- Beermenus.com. The beauty of all these entrants is that all of them believe the market is big enough for the lot of them. Since there is no upfront cost to merchants to sign up, they can post offers on multiple sites.

Cures for Buyers Remorse

Then there is the problem of buyers remorse with group buying offers. Although Groupon says it will offer full refunds for any purchase to a buyer at any time free of charge, not all the other services are so generous. Naturally, this creates a secondary market for group buying offers gone bad. Bought that Harley Davidson tour for your grandmother? Turns out she's not interested. Shucks. No worries! On CoupRecoup, sellers can put their unwanted group buys back on the market. This market reflects the true value of the group offer, because prices on the secondary market can be either higher or lower than the initial offering. Think of it as similar to the second-hand ticket market, where initial pricing is arbitrary. but in secondary markets true supply and demand impacts are allowed to play out.

This explosion of the grouponomy likely will mean reduced margins for players (Groupon still claims it can pull in 50% of the cash paid in by any offers, but other group buying companies are dropping offers into the 10% to 20% range). More importantly, this type of group buying behavior will likely impact the local advertising market as it forces traditional display advertising to become more interactive and more social. But I'll write about that in a future post.