Tuesday, April 5, 2011

The Economics of Group-Buying Websites

There still are a lot of people that don't get the flash sale model and exactly how much merchants give up for the sake of incremental business and new leads.

Buying a $100 voucher at a high-end steakhouse for $50 seems simple enough. However, many buyers think the chophouse is collecting $0.50 on the dollar for the sake of a new sale. It's not. Groupon and LivingSocial charge as much as 50% of the deal's price to the advertiser. In other words, the chophouse is getting just $25 for $100 worth of menu priced food and drinks.

No one's shedding a tear for the local business. Not even an aggressive site sales rep will twist a merchant's arm. It's also quite possible that the eatery can turn a profit on the deal. The diners can order a lot of drinks (which carry a higher margin than food). They can come in a large group, spending far more than the $100 value of the offer. In a perfect world, they'll be so smitten that they'll continue to patronize the eatery at retail price (even if -- in reality -- they'll just hop over to the next Groupon/LivingSocial deal).

The economics behind the practice of offering a dollar's worth of value for a quarter isn't easy. It's why you find more spa and sightseeing service-related offers than boutiques with hard goods to offer. However, merchants get paid -- typically over three months -- even if many of the vouchers expire worthless several months later.

Obviously the group-buying sites wouldn't be this popular if we weren't talking about a win-win-win scenario. Buyers get a great deal. Sellers get more business. The facilitating flash-sale site gets a meaty piece of the action. However, it's important to understand the economics of the model -- just so you're ready when the restaurant owner grimaces after you've run up your tab to exactly $100.23 in costly steaks.

Monday, April 4, 2011

Welcome to Group Offed

Everybody loves group-buying sites. Groupon, LivingSocial, BuyWithMe, and a growing field of flash sale copycats are drawing in deal seekers with marked down values.

The allure is obvious. If I can get $25 worth of drinks and grub for $12, who am I to complain? However, there's a whole other world waiting once the excitement dies down. Some deals are duds. Some merchants don't live up to their end of the bargain. Does anyone know exactly how many of these pre-paid vouchers go unclaimed past their expiration dates?

Group Offed is dedicated to unearthing the sweet deals that went sour. Did you hear about the Brazilian VIP nightclub offer that wasn't honored or the Japanese meal that wasn't up to snuff? How about the FTD offer that wasn't necessarily the bargain that it made itself out to be?

Stick around because Group Offed is here to chronicle the moments when group-buying sites trip up.

We can't help you if you're stuck with a surly waiter at a bistro. Try Yelp.com if you aren't happy with your Swedish massage. However, whenever there's a city-wide deal failure, Group Offed will be here to let you know.

Comment on any of our posts if you have tips, peeves, or suggestions.

G.O.