Tech Magazine

What is Social Buying and How Can I Get in on It?

Posted on the 07 September 2011 by Nerdywerds @NerdyWerds
Deal of the day sites offer deep discounts on great experiences

Promoting a business through sales and discounts is not a new concept. Trading a little bit of your profit for an increased flow of traffic is a practice that's significantly older than anyone reading this site. But as of late, a couple of companies have really emerged to ride this practice to the bank. Sites like Groupon and Living Social offer you one tremendous daily deal. One of my good friends took advantage of one of these deals to go on a cruise with his wife for less than half of the original price. Sounds pretty good doesn't it? But if you have curious mind, you may have wondered on more than one occasion how these sites, or the companies giving the deals, make a profit. Well wouldn't you know it, we're discussing that right now.

As I said earlier, discounts and sales are nothing new. You can stroll through your local mall on a daily basis and find a store having a decent sale. You may have trouble, however, finding a sale on microdermabrasion, which happens to be Atlanta's Groupon today, check out Groupon if you're interested. For these "higher end" deals, you'll want to check out Groupon or Living Social. These sites utilize a social buying model to provide you with incredible discounts on great experiences. The difference between a normal sale and a social deal is that the social deals require a certain number of buyers. The company offering the discounted service sets a minimum number of buyers for the deal. This is the number of people they deem necessary for this deal to make it worth their time. For example, the microdermabrasion deal I mentioned earlier requires 10 people to buy into the deal at $99 each. If 10 people didn't buy in, 77 had by the time I wrote this article, the deal is nullified, no one is charged and the company issues no coupons.

Everyone knows, we'll, I'd hope they know, that the point of a business is to make a profit. So where does Groupon or Living Social make money? If you buy a massage for $100 from one of these sites, they will typically take around half of that, so $50, and forward the rest to the massage parlor. You may be asking how this is a good deal for the companies offering the deals. Firstly, exposure through these deals are through the roof. Instead of paying for advertising on a search engine or on the TV/radio, they get to post the deal to all of the millions of people on these sites for free. There is no up front costs. They essentially pay a finder's fee for each person that buys the deal, in the hopes that they will return for follow up visits. The second thing that makes it worth the provider's time and money is the return visits. I'm considering buying my wife a Groupon in Atlanta offering $200 worth of prescription lens for $30. This is a pretty deep discount, considering the company may receive $15 or $20 on this deal. But if my wife has a good experience and returns for her future optical needs, the initial investment will have been more than worth it.

If you're thinking the business model sounds a bit flimsy, you're not alone. Many in the business community also wonder if these sites are sustainable, and some go as far as to call them ponzi schemes. Groupon publicly disclosed, in their IPO documentation, that they lose approximately US$100 million per quarter. But that hasn't stopped Yahoo! from offering Groupon over $3 billion in October 2010 to buy it out, and Google offer close to $6 billion later that year. So questions about whether this business model can survive seems to be open to interpretation, but it does seem certain that the company is worth it to all the people buying those deals, and the companies wanting to buy them.

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