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How Group Buying Websites (Daily Deals) works?


Group Buying Websites (Daily Deals)  is one of latest trends in Web commerce, it's a way to use the Web to get a volume discount, Groups of consumers will band together to buy a particular good, and local Merchants will be forced to offer wholesale prices to these groups.
I'll try to gather all important information in a series of posts to explain all about Group Buying (Daily Deals) websites .

Group Buying websites (Daily Deals) definition:
Group buying ( Daily Deals) websites partner with local merchants to offer consumers products and services at significantly reduced prices on the condition that a minimum number of buyers would make the purchase.
Many of the group buying (daily deals) websites works by negotiating deals with local merchants and promising to deliver crowds in exchange of discounts. The group buying (daily deals) websites differ from other buying websites in how they work and what they do to reward users who share deals.

How does group buying ( Daily Deals) websites works? 
The merchant agrees to offer customers a specific product or service at a greatly discounted rate (usually 50% off or more) if the group buying website can generate more than the specified minimum number of sales chosen by the merchant. Once the minimum number of sales is reached, the deal becomes activated and all the customers that signed up for the deal become eligible.

What if the minimum number of sales isn’t reached? 
If the minimum number of orders isn’t reached then the deal is canceled, no one is able to take advantage of the deal.

How does group buying (daily deals ) websites really works ?
Group buying promotions are able to generate a large number of sales for the merchant in a short period of time. Usually these deals are only posted for a 24-hour period  ( but here in Egypt it may take longer, sometimes the offer is posted for a week) and the viral nature of this promotion means that sales can be on the order of hundreds to thousands of orders in a single day/week.
For many local business owners equates this to an entire month’s worth of sales that are obtained in just a single day/week.
While the business owner is only making 25% of the profits (Grouping websites takes 50% of sales) business owner (local merchants) would normally earn for a typical sale but they are willing to take this short-term loss for the following reasons:


1-Cash flow boost:
Payments for vouchers are processed by the collective/grouping buying website within a very short period after the deal is closed, and the local merchant will soon receive a quick boost in cash flow for that month.

2-Not everyone will redeem their voucher:
People are lazy and not everyone will show up to turn in their voucher to the merchant and take advantage of the deal ( a very true fact, me myself bought some vouchers & never redeemed them, I will refer to the exact percentage of customers that never redeem the vouchers in the next post)  .

3-Inexpensive, effective advertising:
Businesses spend a lot of money on advertising and yet it’s often very inefficient. Daily deals promoted by group buying websites are fairly inexpensive and they are much more effective at generating real sales rather than just increasing brand awareness.

4-New customers:
Local businesses are always looking to expand their client base and new customers are a necessity for doing so.
Daily deals are able to attract many new clients by offering discounts that get the first-time customer in the door.

5- Return customers: 
Businesses that use group buying (Daily Deal) website for marketing their products or services are hoping that the new customers that sign up for their deal will like what the local merchant offers and become a return customer.
In the coming post I'll provide more information about:
- Types of businesses that are better suited for group based promotions.
- How to calculate a daily deal revenue?
- Group buying ( daily deals ) websites listings worldwide.

259 comments:

1 – 200 of 259   Newer›   Newest»
Alaa Nassef said...

Great article Jilan. Waiting for the next post

Jilan Wagdy said...

Thank you Alaa :) , Isa today I'll post it.

Jilan Wagdy said...

I would to post a rich comment posted on my facebook profile by :
https://www.facebook.com/ahmed.elasra

Jilan, great post.. thumbs up :) .. I have some insights I'd like to know your feedback about them as well

The main advantage of this model is that it is really helping local merchants to gain new customers because people have more chances taking the leap and try something new for a big discount.

Another benefit is the cash boost it gives to the merchant, however this is a double edged weapon.. first because usually the local merchant does not take the full amount all at once (this is the process in USA I don't know how it goes like in Egypt) and second because it is not always 50% 50% between the merchant and the group buying site (sometimes it is 20% 80%again this is the process in USA).

Apart from that as you said the local business actually takes 25%(or less if the discount is more than 50%) of the amount of money they usually sell one item with, so they have to utilize some math equations and concepts mainly the economics of scale to calculate the end result eventually if it is worth it or not, I am sure that not all local merchants do that whether in USA or Egypt so for most of them it is a bet with a good reputation of high chances to win, and having a loyal customer who comes regularly and pays 100% using one of those coupons may cause him to have a perception that he is over paying to this merchant, he will think like if they sold it once with 20 EGP then they were stealing my money before when I was paying 40 EGP, I am not going there again, so that actually is a loss for the merchant to lose such a customer, of course not all loyal customers will think like that but some of them surely will.

Also the fact that those sites do help to generate new leads but they do not help with keeping those new customers loyal to the merchant, which is fine of course but that actually helping customers to try new merchants providing similar products and it's up to the clever merchant to build a relation with the new customers to and make them loyal ones.

My conclusion, if it is at the end of the day up to the merchant to gain new leads and transform them into loyal customers, why do you need a group buying site?, do it yourself!

Now I feel like I am talking a lot, I still can list a lot of such hidden tweaks in this model but enough for now :)

Thanks again for your post, looking forward for more of such insightful details!
To check the rest of the comments visit:
https://www.facebook.com/notes/jilan-wagdy/how-group-buying-websites-daily-deals-works/10150378900754414

johnyaeger85 said...

Group buying is a workable strategy for small businesses. It's the execution and the preparation that would gauge the success of this model.

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