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Five Reasons Investors Should Not Consider Group Buy Companies For Long–Term Investing

If you are not aware of it yet, the group buying wars are heating up. At the end of 2010, Google offered the owners of Groupon, the most popular group buying website, $6 billion to purchase the company. Groupon declined the offer and, instead, is reportedly gearing up for a $15 billion IPO, according to Mashable.com. Now, Mashable.com is reporting that Google is about to launch their own group buying website, Google Offers. Around the same time that Google offered billions to Groupon, it was reported that LivingSocial, the second most popular group buying website according to Experian Hitwise US, received a $175 million investment from Amazon.com. With so much money being invested into group buying websites by so many large players, you probably believe that you should invest in one of these companies as also.

Well, despite all these corporate giants investing millions and billions of dollars, I believe it is a bad long-term investment, and I will give you five reasons I feel this way.

  1. The barrier to entry is low.
    • The technology necessary to make a group buying website work is relatively easy and can be completed in a relatively short period of time. I have worked on websites in the past whose code can be tailored to fit the group buying site’s business model with some minor modifications.
    • More often than not, group buying sites business model is based on the site posting one huge deal per day. Obtaining ONE deal per day from local small businesses is a minor barrier to clear considering that the deal only goes through IF AND ONLY IF the business owner’s target number of deals is met. So, if the small business owner sets the pricing correctly, they are bound to make their target profit if the deal goes through. If it does not, they just received extremely low or no cost advertisement to the group buying website members.
  2. Membership building is easy, but loyalty building is not.
    • As a customer, I have no loyalty to group buying sites. What I care about is the price, the quality of service delivered (or product being purchased), and sometimes the retailer. So, whether my favorite restaurant advertises on Groupon, LivingSocial, or another website, I will find that deal because I have registered with multiple sites, and I suspect other customers are the same way.
    • To a customer, there is no real product or service being delivered by a group buying site that a customer can associate specifically to a given site. There is no real advantage of purchasing from one group buying site vs. another site. To compare, consider eBay the auction site. EBay delivers the largest list of auction items everyday for customers willing to participate in auctions. So if a customer is looking to bid on items chances are the first site they will visit is the site with the most deals to bid on currently. For group buying websites they all have that ONE big deal every day.
  3. Customers visit for short periods of time. The business model is based on delivering instant gratification to the customer in the form of a large discount once a day. If the deal of the day is what the customer is looking for, it is a win for the site. If the deal of the day is not what the customer is looking for, they are most likely gone because the instant gratification they are seek is not there. Selling additional services become difficult unless these sites deliver on their main deal. So, membership does not translate to sales, potential sales, or up selling.
  4. The business model is local.
    • The deals are local. Because of this, it is better operated by a local business or local group (ex. area chamber of commerce). They know what is, from a consumer point of view, hot in their city every single day and can react quickly to solicit business from retailers quicker than a national company.
    • Groupon and LivingSocial’s large customer base is irrelevant to local business owners. Small business owner are more concerned with the number of users in their local area.
  5. There are too many competitors. Every day it seems as though a new group buying site is started. So many of them burst on to the scene, and we should expect many more to because of the low barrier to entry. There are so many in existence that there are sites that round up all the deals of the day.

Many large corporations and investors are investing millions and billions in group buying sites. In my opinion, you should take your money elsewhere. These sites do not have a distinct product or service that is difficult to duplicate. Furthermore, given the amount of competition emerging everyday in this space, investors can expect to see their investment slowly decrease as the much smaller players continue to accumulate in this market. Deal of the day sites are hot now, but long-term, the business model they follow is not sustainable.

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