Group buying – The web breathing new life into a long established behaviour

Zagat has recently launched Zagat Exclusives, a group-buying scheme where customers who sign up can save up to 50% on meals at Zagat-rated restaurants. The deal is available for a limited time only, and the price point decreases as more and more people take up the promotion. When time is up, everybody (who signed up for the deal) will pay the lowest price.

While group buying is a long established behaviour, it acquired a new lease life, and a new form, with the web. Indeed, group discounts have long been common practice in the travel industry, in all sorts of ticketed entertainment and in numerous retail outlets, to name a few applications. The big difference between the traditional group buying discounts and the web-enabled ones is that the onus is no longer on the buyer.

Without the web, it was up to the potential customer to a) identify other potential buyers, b) motivate them to acquire the product and c) manage the acquisition process (e.g., collect the money from all group members). The net benefit for that buyer was a function of his/her persuasion skills and the extent of his/her network of friends and acquaintances. With web-enabled schemes like Zagat Exclusives, however, total strangers are brought together by the specific deal, in a process initiated and entirely managed by the supplier.

From the point of view of the firms there are various benefits of group buying. The deal may help move old stock[1], which is particularly appealing to those trading in industries characterised by seasonal products or planned obsolescence such as consumer electronics. The scheme may also attract new customers, though unlike traditional group buying schemes, web-based ones are likely to attract customers who were already aware of the product or firm and, therefore, there is some self-selection and risk of lost revenue. Another benefit is that existing customers may be induced to buy the product more often or in more quantity than otherwise. It also allows sellers to tap into economies of scale, whereby it becomes cheaper to serve a group of buyers, than it is to serve each of the buyers individually. And group buying also reduces risk to those firms selling time-constrained goods or services such as plane flights, shows, or training programmes.

These schemes, however, have their downsides. They are mostly beneficial for firms facing high fixed costs and low or zero variable ones, such as companies trading in digital goods. The schemes also work better where there are limited arbitrage opportunities. And firms should not ignore the risk that repeated discounts might condition customers’ expectations regarding future price levels. So, firms participating in such schemes need to think carefully about how to convert these customers into full fee paying ones.

[1] Or inventory

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