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Make Group-Buying work for your business

Unless you’ve been holed-up in a snow-cave the last few months (Saskatoon is so lovely this time of year), you’ve probably heard about this “incredible phenomenon” called Group-Buying. It’s touted as the ultimate way for you to generate business awareness and get more clients through the door.

South Africa hasn’t been left behind either — someone mentioned to me last week that there are now 39 such sites around in South Africa, with an airline just starting one. Even local Shock-Jock, Gareth Cliff, has one. With everyone jumping on the bandwagon of Group-Buying, should you be putting your business on there?

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It depends.

Firstly, let’s differentiate “Group-Buying” from “Deal-A-Day” sites.

Deal-A-Day websites are exactly that, you offer a specific product or service as a Special Discounted rate for one day only. Absolutely anyone can buy the product (or multiple products) at the reduced rate. Very often the Deal-A-Day websites negotiate a bulk-price with you to secure the discounted rate — and they then add their mark-up and sell it off to their clients. The problem is you may only sell one or two products.

Group-Buying works on a similar principle, except that the deal only “Kicks In” when a certain number of people have indicated that they want to buy the product. So you can decide, for example, if you want the deal to kick in at 10, 20, or even 50 people. Obviously the bigger the number, the harder it is to close the deal.

There is a twist though, in that almost every Group Buying site I’ve come across expects you, the Business Owner, to provide at least 50% discount off your usual price (to make it worthwhile for the buyers) and then it’ll take another 50% cut for itself. This means that the final amount you will actually get in your pocket is only 25% of what you normally get.

That’s a really steep cut to take and you’ve really got to make sure you can afford that!

Some of the companies I’ve consulted with have completely baulked at the idea of selling something at 25% of the regular price, especially if you’re actually going to make a loss for every sale.

To make sense of the concept, let’s consider two points:

1. Acquisition Cost
2. Life-Time Value

The Acquisition Cost of a client is the money you pay (or are prepared to pay) for a new client for your business. Even in normal marketing there is an acquisition cost. If you pay R1000 for an advert, and 10 people buy from you, then the acquisition cost is R100 (US$12) per client. Most companies have no clue what their client acquisition cost is. Step 1 is figure out what your acquisition cost currently is.

The Life-Time Value of a client is the money a typical client will actually spend on your business (in other words until they become a “regular” — which is of course what we’re trying to achieve.

So let’s use a practical example:
Jeremy owns a Car-Wash and normally charges R100 per car wash. Using a Group-Buying site he promotes his car wash for R50. R25 goes to the Group-Buying site, and R25 (US$3) goes to him. Unfortunately it actually costs him R40 (US$5) for every car wash, since he’ll be paying for rent/water/electricity/staff, etc. So for every sale he makes, Jeremy is losing R15.

We’ll call that his “Client Acquisition Cost”.

On average, however, people are always so happy with his service, that they return at least once a month to get the car washed. So, over a 12 month period, Jeremy can expect at least R1200 spend from his clients. The Life-Time Value of his client would probably be much higher as people will continue to return after 12 months.

In this example it makes absolute sense for Jeremy to use the Group-Buying idea to bring more clients to his car wash, even though he’s making an initial loss per sale.

Things to watch out for
In any marketing method there are a few things we should keep an eye out for, however, and Group-Buying is no different. A simple Google-Search online will give you heaps of things to watch out for, but for me here are my concerns:

1. Coupon Crazies: Factor into your maths that you will get a few people who buy your coupon only because it’s on special. These people have absolutely no intention to come back to your business again. I call them Coupon Crazies, because they live on coupons — they will never pay full price ever again.

2. Contract Limitations: Some Group-Buying sites have some seriously impressive lawyers, so make sure you read the fine-print before signing on the dotted line. One of the biggies is that some Group-Buying sites will insist on a 12 month exclusivity which means you cannot use their competitors. Now what if your product just doesn’t work on their client base? You’re stuck with them. I don’t have a problem with exclusivity but I’d limit it to 30 – 60 days.

3. Pay-outs: Make sure you understand exactly when you’ll be paid your money. Will you be paid in full or in instalments? If you only receive the money after 90 days (to give time for Credit-Card reversals, for example) does your business have the cash-flow to carry the coupons until you get paid?

4. Understand the Deal: I have already heard of a hair-salon in Cape Town who is refusing to honour coupons because there is a discrepancy between what they’re actually being paid per coupon and what they were promised. Make sure it’s spelt out really carefully. Make sure you understand the legal complications too. Like any contract you sign, consider asking your lawyer to read through it for you and make sure there are no loopholes that will get you in the long run.

5. Professional Bodies and Marketing Rules: Depending on your business/industry, your company may actually be prohibited from marketing through “Discounted” or Group-Buying sites. In the last 2 weeks I’ve come across three completely different industries that are not permitted to market via Group-Buying. It pays to find out first.

6. Work-Load: Are you able to handle a huge influx of clients? If 100 people buy the coupon, and it takes 6 hours to look after the client (say for example you sell a full-body massage package), that is 600 hours of work. Can you cope with that? Can your staff? And are you able to look after your regular clients during that time – the bread-and-butter of your business. You don’t want to spend a month or two working with coupon-only people and then completely mess up your cash-flow because there are no paying clients coming in.

7. Upsetting Regulars: A downside to a coupon system like Group Buying is that your regular clients, who are paying full price, may have their noses put out of joint a little because you’ve never rewarded them for their patronage.

8. Brand Damage: Be careful who you get into bed with. Whichever Group-Buying site you decide to work with, ensure that they will respect your brand and your business. Ask them what efforts they make to ensure your company is held in high-regard by their clients. What do they proactively do to protect your company or brand?

9. Regular Price: If your regular price is R100, and your Group-Buying price is R50, clients may begin to see your regular price as too expensive or that you’re making too much profit anyway. Discounted pricing can put you in what I call a “Discount Loop” where you continuously have to offer discounts to keep people happy because they never want to pay full price again. If you’re not running a special, the regular customers stay away, waiting for the next coupon to kick in. In my opinion, the Discount Loop is the greatest threat to any business wanting to use Group-Buying as a marketing method.

Choosing a Group-Buying site
As you can see, there are quite a few things to consider before using Group-Buying as a marketing tool. It becomes even more complex when you decide on a Group-Buying site to promote your business. It needs to be taken as a serious decision.

Don’t go for the first person that phones you asking to promote your business on their site. Some of these Group-Buying sites train and use cracker-jack phone gurus at Telemarketers and they’re brilliant at sweeping up your emotions to get you to sign with them.

The way I see it, they need to “tender” or “interview” for the privilege of promoting your business. With 39 Group-Buying sites in South Africa to choose from, you are the one with the power. Prepare a questionnaire that you can email the salesperson with the points raised above. Don’t be shy to ask the hard questions.

Negotiate things like Pay-Out dates, commission percentages and contract limitations. Make sure that you’re 100% happy with the final proposal. And then redo your maths to make sure you’re prepared to pay the Client Acquisition. How does it compare to your existing marketing methods?

Go view the company website — click on “Past Deals” (they all have those) and see how many deals were made in the past. If the Salesperson is promising you 50 deals, but they average 10 deals on past sales, find someone else.
If they do have the high-sales, phone up a few of their previous clients and ask them about their honest experience (everyone has contact details on a website somewhere). Would they do it again? What would they do differently? Were the payouts done on time?

Test and Measure
Once you decide to run a campaign on a Group-Buying site, make sure you have the methods to track the results. If 50 coupons were sold, how many indicate they will be coming back again? How much money did they spend with you? Are they a Coupon Crazy, or will they turn into a regular customer? Are you able to ask these people to complete a quick survey in store?

Test and Measure everything. How accurate was your maths and your predictions? Did the Salesperson’s targets come to fruition? Was this a worthwhile exercise?

In Conclusion:

Group-Buying can be an incredibly powerful tool for you to promote your business and acquire new clients. Just make sure you do all the maths very carefully. Don’t be swooped up in the hype over the phone-call. You’ve spent years building your business, so take a little time to decide on the guys who will be responsible for your brand.

Image: Michael Holden

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