Global e-commerce website Groupon is cutting jobs and closing operations in seven more markets, shortly after its recent exit from Turkey and Greece.
Taiwan is on the list of the latest downsizing. The closure of its Taiwan office offers an opportunity to review its group purchase business model.
Usually a group purchase website operates like this. It looks for suppliers who are willing to offer their products or services at a discount, say, 30-50 percent. When a sale is done, the website gets a 30-50 percent commission.
Why are companies willing to offer such big discounts?
One common objective is promotion. If it is a new shop, or a poorly located outlet, discount offering is a quick way to attract traffic.
The logic, or hope, is that customers will buy other things once they have come to the shop, or that after learning about the place, they will come again for other purchases at normal prices.
Offering group purchase discount is also a good way to get rid of outdated inventory and generate cash flow.
But it can also be easily abused.
A group purchase offering may attract customers that you don’t like to have, AppWorks founder Jamie Lin writes in his blog.
Some customers are professional bargain hunters. After taking full advantage of an offer, they simply start looking for another one.
For them, there is no such thing as a repeat purchase, Lin explains.
Very often, after the discount and commission, shop owners find themselves cutting the original price by as much as 75 percent.
Lin cites Posie Cafe in the United States as an example. The coffee shop lost US$8,000 on 1,000 vouchers they sold and failed to gain much real business.
If price is the only thing that draws customers, group purchase won’t be an effective marketing tool, AttendEC co-founder Karl Chan notes in his blog.
It stands a better chance of working if there is a recurring need.
“Take yoga classes. One trial lesson won’t help the customer achieve anything. Once group discounts draw in the customers, as long as some of them decide to keep learning, it would be a profitable deal,” Chan explains.
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