Another Look at Group Buying

I’m sure many people have heard about Groupon by now. If you haven’t, Groupon reportedly holds the record for the fastest growing company by revenue in history. It is a service that promises business massive exposure and many new customers if they use Groupon to offer ‘deals’.

Groupon is so successful that it has been copied tens of times all over the world. Even here in our Kenya, we have Rupu, Zetu and Sokopal.

Recentlyu, Groupon filed for an IPO (Initial Public Offering) in the US stock markets. This meant that, for the first time, anyone would be able to take a look at Groupon’s books. What people found was shocking. Basically, despite its very high sales revenues, Groupon is losing a whole lot of money and is nearly insolvent. But guess what? They continue to pay their initial investors hundreds of millions of dollars despite making losses.

This sounds vaguely familiar, doesn’t it? Just for reference: A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

That aside, Groupon is also reportedly not doing very well in its oldest markets, like Boston.

No one can tell what will happen to Groupon, but it seems the once bright star may be fading. At the very least, the business seems a bit ‘troubled’.

What about the Groupon look-alikes in Kenya? How are they faring? I cannot say with any amount of certainty how these businesses are doing. However, I feel that the amount of talk about these companies has gone down, and so has their visibility in the market. But this tells us nothing about their performance. Another sign may be that MyShillings and Sokopal seem to be ailing. Regardless, until we get our hands on solid financial records, we cannot say how these companies are doing. But if Groupon is in trouble, will our local copies come to face it too? Is the business model fundamentally flawed? No one knows.

Thinking Bigger
Let’s leave the doom and gloom for a minute and talk about something exciting: 123Cars. This is a website that enables people to buy cars cheaply. Here’s how it works, if you go alone to buy a car from a seller, you may get a price X but if you come with 10 of your friends and you all want to buy the same car, the seller is likely to give you significant discounts. 123Cars enables people to save thousands of dollars when purchasing a car.

If you think about it, this is a variation of the Groupon model. But I think it is better. Groupon focuses on forcing a business to give massive discounts (usually 75%) to give them hundreds of customers at one go. There a few problems with this model:

  1. The discounts are too high for the business to afford
  2. The business may get so many customers that it cannot serve them with their usual standards of quality
  3. The kind of clients attracted by these deals are often ‘deal hunting’ and do not become loyal customers

In contrast, 123cars:

  1. targets a niche industry where bulk discounts really do work
  2. brings highly targeted customers – the customers are all interested in cars whereas the people buying Groupons are diverse and just in it for the discount

I feel that the 123cars variant of the Group Buying model offers more value to businesses.

Instead of simply coping Groupon (or even 123cars!), local entrepreneurs should think about what would make more sense in our market.

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