The power of the crowd

In the wake of the recession, consumers are banding together to get price reductions on a growing range of products. Nicola Clark asks whether group buying is just a form of discounting or a real shift in consumption.

When controversial political cartoonist Ted Rall wanted to return to Afghanistan to write the follow-up to his book, To Afghanistan and Back, he did not approach a publisher. Instead, he asked a group of strangers to help fund his expedition.

Through Kickstarter.com - a US-based platform, where creative types including filmmakers and musicians can seek funds direct from supporters - Rall secured a total of $25,999 from 211 backers, who will receive copies of the book and other rewards.

Kickstarter, which could be described as Dragons' Den with a heart, has facilitated the funding of a wealth of projects and businesses, from bespoke jewellery to handpainted comics. In some cases, the products have then gone on to be picked up by mainstream publishers and distributors.

Gaining momentum

Another example of the growing power of the crowd is Zopa, an online peer-to-peer lending service that has flourished in the wake of the recession. It has arranged more than £90m in loans since its launch in March 2005, and now accounts for 1% of all personal loans agreed in the UK each month. Lenders get a far better deal on their investment than they would via traditional banking products, as do borrowers. In addition, Zopa's default-rate on loans is the lowest of any UK lender, at just 0.7%.

Lulu Phongmany, business development and marketing manager at iVillage.co.uk, the UK's biggest women's website, says the key strength of the group-buying phenomenon is its democratic nature. 'A lot of the time the consumer doesn't have much power, but by joining together with others to access things they couldn't usually afford, they become highly influential. It's easy to see why this kind of group buying will gain momentum.'

Over the past 12 months there has been a flurry of new companies trying to replicate in the UK the success of US-based deal-of-the-day website GroupOn, and capitalise on the potential of group buying here. As consumers fret over the strength and length of the economic recovery, this kind of purchasing offers suppliers a clear way to fulfil capacity without investing in advertising.

So should brands get on board the group-buying bandwagon?

Christopher Muhr, chief executive of GroupOn in the UK, says the business model has gained traction quickly as it offers brick-and-mortar businesses an easy route to establishing their presence online. 'The beauty is it's all about building excitement, so it's a often a very spontaneous purchase, which is very attractive for brands,' he adds.

According to Rob Berrisford, founder of Crowdity, one of the most-recent entrants to the UK's group-buying sector, the approach has huge potential. 'There really is no limit to what you can do with location-based social-media platforms,' he says. 'It's a huge marketing tool.'

However, Robin Grant, managing director of social-media agency We Are Social, warns that the speed of launches in the sector will be hard to sustain. 'The success of GroupOn in the US has meant that there is a group-buying offering launching almost every week,' he says.

Grant adds that marketers should think carefully about which operators they tie up with; popular offers demand a substantial level of back-end support to ensure all deals are honoured in a timely and professional way. This is not being achieved across the board and brands risk being slated online if they fail to meet their commitments.

This caution is echoed by Martin Bailie, head of planning at digital agency Glue Isobar, who flags up the short life span of many fledgling group-buying sites. However, he also points out that, as consumers' confidence in different types of online transaction grows, they are ready to place greater trust in ecommerce, which presents a big opportunity both to mainstream and niche brands.

Brand rewards

According to Lopo Champalimaud, founder of group-buying site Wahanda (see box), businesses in the sector generally fall into one of two categories. 'There is the daily-deal model and the private-sale model,' he says. 'The latter is driven by fierce discounting and is more focused on fashion brands. This has been very successful in France, but has not translated so well to the UK market.'

Henry Towe, partner at digital consultancy FaR, explains that the sector's typical business model is based on brands sacrificing 50% of their margins and then sharing 30% of their profits with the group-buying company responsible for brokering the deal. This may seem a high price to pay, but participating companies benefit from exposure to huge audiences. Moreover, brands have long been willing to subsidise offers as an effective way to attract new customers.

Vaughan Denny, an independent consultant working in the group-buying sector, warns that marketers seeking to use this approach risk exacerbating a sense of information overload and voucher fatigue among UK shoppers. 'Consumers in the US are more used to using coupons,' he says. 'It's more ingrained in their buying habits and each city in the US is a massive market in its own right. This just isn't the case in the UK.'

Denny also highlights the 'risk that you can devalue what you are selling' and suggests that, as opposed to 'the DFS style of continual discounting', the benefits of teaming up with a group-buying site is that the offers are made on a one-off or limited basis.

However, brands looking to get involved with group buying need to be aware that the only way to gain cut-through is by offering a substantial discount. The power of the group and the popularity of the deal rests on a willingness of the company to sacrifice margins in exchange for exposure.

Berrisford believes that the appeal of group buying for marketers lies in the fact that it is based on a defined and relatively straightforward process. Group-buying sites such as Crowdity will honour a deal only when it is taken up by a minimum number of subscribers; offers are also capped. 'It's easy (for marketers) to get sign-off from finance as it's a set and structured sell with limited sales,' he says.

The challenge comes when this is added to the level of discounting high-margin brands are already offering consumers as a matter of course. For many of these brands, group buying represents an extension to the 10%-20% or buy-one-get-one-free 'discount dependency' on which they are hooked.

'It's difficult to see how group buying will be a benefit for a high-street brand, but for a company such as an airline, wanting to screw the competition, it's a great way to build a database very quickly,' says Ballie. The challenge comes when the companies attempt to translate this short-term sales spike into a long-term branding exercise.

Despite this, group-buying platforms such as Zopa and Kickstarter suggest that a genuine collective of buyers can fundamentally shift the balance of power in any given market. These success stories do, however, remain the exception, rather than the rule. Apart from anything else, both businesses are marked out by their rejection of ruthless commercialism, instead building their following in a more organic way.

For the majority of consumers, the key selling point of these group-buying sites is still the level of discounts they offer. While this is clearly good news for consumers, it certainly does not present a simple, catch-all strategic option for every brand.

FOCUS ON WAHANDA.COM

Health and beauty-focused site offers a significant marketing outreach tool

Group buying is not a one-size-fits-all solution for brands seeking to expand their customer base via social media. However, in the UK it has worked exceptionally well, with local businesses such as spas, hairdressers, hotels and restaurants, which traditionally enjoy high margins and are faced with mixed availability. For those with unsold inventory, the benefits of group buying - or 'mob deals' - are clear.

One business to have capitalised on this trend is Wahanda.com, a group-buying site that focuses on the health and beauty sector. Co-founder Lopo Champalimaud says that while some in the industry feel that group buying is a flash in the pan, consumers like the idea of having deals curated for them; for businesses, it is a good way to reach out to new customers.

The business model clearly works well for Wahanda, as 95% of providers of health and beauty services are single-owner-operated businesses. 'We have more than 180,000 listings of businesses, with more than 1000 deals every day across eight cities, and as the only company that is sector specific, we have a point of difference,' adds Champalimaud.

In effect, the group-buying model is a huge marketing outreach tool. In a sector where consumers are often very loyal, Wahanda gives consumers a reason to try new spas and new treatments.

The group already has its sights firmly set on expansion with a dedicated US operation, it is also looking to sell discounted beauty products directly to consumers.

FOCUS ON GROUPON

Market-leading site claims it offers access to a hard-to-reach audience

GroupOn is a deal-of-the-day website that grew organically from local deals in Chicago. Its acquisition in May of European site MyCityDeal made it the world's biggest deal-of-the-day group.

Christopher Muhr, GroupOn's UK chief executive, describes its users as typically 25-40 years old, with a slight female bias (55% are women). Crucially, they genuinely want to try something new.

'We can deliver a demographic that is hard to reach,' he says. 'A lot of companies, even with a substantial marketing budget, struggle to connect with this audience in a meaningful way.'

The UK market is not without its challenges, however. 'UK consumers are much more picky than the rest of Europe,' adds Muhr. 'They are used to such high levels of discounting that they expect a higher levels of cuts.'

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