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Getting the hell out of daily deal Dodge: 1-day’s Race Louden on the flawed group buying model

June 20th, 2011 by Race Louden

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In the past nine months there has been an increase in the number of group-buying websites offering vouchers for anything from haircuts to hotels to beauty therapies. These sites offer a heavily discounted, service-orientated deal, usually for 24 hours, in a variety of cities around the country. But as a marketing tactic, while successful in some instances, the group-buying model is flawed in a number of ways, primarily because it often attracts the wrong kind of customer to a business.

The group-buying model was pioneered by American company Groupon, which launched its services in November 2008. Theoretically, the group buying model works well: a business in need of fresh faces through the door offers a discount on their service. The discount is advertised for a limited period, leaving it to customers to purchase it in the form of a voucher. Customers are happy to redeem the voucher, and businesses are happy to receive the new customer. After sampling their services at a rate usually not charged, vendors hope they will return loyal and satisfied in the future.

Recently, however, warning signs have been appearing that this is not the case. Kiwi consumers have gone on a buying frenzy, snapping up these heavily discounted deals in large volumes with little intention of returning to the same supplier and only intent on securing the next deal. Customers turn into deal hunters and will visit whatever establishment is offering the deal at the time. Meanwhile, the vendor has another objective: upsell and turn these buyers into loyal customers. It’s finding a middle road between these two conflicting goals that is not working in the vendors’ favour right now.

A recent study in the United States by Rice University School of Management associate professor Utpal Dholakia confirms that, in order for a group-buying campaign to be profitable for a vendor, the ability to upsell is absolutely vital. Interestingly, the study notes that employee satisfaction is also a pivotal factor in a campaign’s profitability, because satisfied employees are better poised to upsell sudden influxes of new and discount-hungry customers.

Another issue to note with group-buying is the fact businesses are simply not often prepared for the sudden influx of customers as the result of the deal. We have seen a number of situations where customers have demanded their money back when the supplier is too under-resourced to fulfill the voucher. In addition, the discounted deals can also frustrate already loyal customers who want to know why their loyalty isn’t being rewarded. Both these scenarios can cause long-term damage to the supplier’s brand.

An individual massage provider we dealt with sold 500 vouchers for one hour intensive massages. Underestimating the power of group-buying, the provider was incredibly overwhelmed, and found themselves unable to cope with the sudden influx of business. The constant bookings meant existing customers couldn’t be seen, and service was compromised. This is a situation that has become all too familiar and frequent.

Furthermore, the phenomenon has also had a detrimental effect on prices charged across industries that have appeared regularly on group buying websites. A prime example is the canvas photo printing businesses. 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.

Whilst we have seen situations where group-buying is beneficial for vendors in certain scenarios, we are strongly of the opinion the flaws outweigh the benefits and this will, in time, show itself to be an unsustainable business model.

So at 1-day, we’ve made the bold decision to close our voucher side of the business, 1-dayout. It was a great ride while it lasted and an exhilarating area to be involved in but it’s clear that we simply can’t sustain this in New Zealand. Our 1-day business, which sells high quality discounted products online, is going from strength to strength, however, and we believe this is the real growth area.

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Tags: 1-Day, daily deals, group buying, Race Louden