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From a business perspective, when I think of Groupon or Living Social, I think group buying is a bad idea–like many others. Too often companies are overwhelmed by an influx of new customers. This can result in a loss of profits and poor customer experiences. But in all fairness, whether group buying is good or bad for your company depends on a variety of factors. Over time, I’ve come up with a few rules that I use as a metric when it comes to determining whether participating in a group buying site is for your company:
  1. Group buying may not be good for you, but it’s always good for the group buying site.
  2. Know your gross margins. (50% goes to the customer and 25% goes to site.)
  3. Know your net margins. You’re spending cash on that marketing.
  4. Can you handle peak sales and still deliver the same quality experience of your brand?
  5. Do you have high margins after fixed costs are covered? If you do, creating more product to appease more customers might result in a higher margin.
  6. Are you in a commoditized industry? For example, massage therapists and auto detailers don’t have a high switch cost.
  7. Will the customer provide recurring revenue? A one-time $50 savings is great for a customer, but a lifetime relationship with a customer could equate to $500.
  8. Will a new customer allow for alternative revenue streams? For example, if a magazine circulation grows from 100k to 1M, more advertisers will be interested.
  9. Will the customer be willing to pay full price later?
  10. Do you gain new repeat customers without alienating existing ones?
As a business, being busy doesn’t always mean bigger profits. You need to remember to keep both the quality of your brand and your customer’s experience sacred. If you can’t keep up with demand, or if higher demand will cost you more in the long run, group buying isn’t for you. But there are alternatives. Companies that have more control over how they interact with potential customers have a better future. One example is Village Vines, a site that allows local restaurant merchants to control the times and quantities of tables filled at a discount. These business models are advantageous. If you can control the discount, you can control the quality of the customer’s experience. You’re not left riding the peaks and valleys of typical group buying sites. What do you think of group buying sites?

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