Why are so many people jumping on the Groupon business model bandwagon?

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I subscribe to a number of news alerts through Google and it seems that I am constantly reading articles about a brand new company that is trying to emulate Groupon’s business model of offering limited time, discounted deals to local customers. Groupon has become a major success story as they tested their business model in Chicago and then expanded into other major cities in the US and Canada. Now the company has sales representatives operating in over 250 markets in North America, South America, Asia and Europe.

The idea for Groupon is very simple when it comes right down to it. Find a company willing to offer new or existing customers a discounted offer in order to gain foot traffic to their business. Depending on your sales representative and the agreement you put in place, you get a percentage of the money they collected and serve all these new potential customers. The thinking is if you’re able to satisfy new people entering your location, you’ll be able to win them over for future business.

Regular advertising outlets such as local newspapers and radio cannot compete with the direct response that Groupon can offer businesses. While newspaper readership is on a steady decline despite the increased costs of printing and delivery, company owners are looking for a new way to get customers in the door. Groupon definitely offers them a proven business model in any market they’re established in. There’s been plenty of feedback from companies who did not cap an offer and were inundated with more customers then they could handle.

When you create a business changer such as Groupon, be prepared for competition. As I was doing some research I found a partial list of companies who are trying to take a piece of the group buying pie. You can check out this list at Venture Beat Profiles. This doesn’t include local companies that are doing the same thing. For instance in Peterborough there is two major websites offering the same thing, as Groupon has not entered our market. WagJag has teamed with the local community newspaper while GoLowDeal is our local radio station’s offerings. Heck, I even registered PeterboroughSaves.com a few years ago with something like this in mind but never got around to developing it.

So why are so many people jumping onto this group buying bandwagon? While I’m sure there’s many reasons I think one of the biggest reasons is that it’s not really that complicated. For a few hundred dollars you could have an offshore programmer build the backend for you, including social media aspects of it including automatic posts to Twitter and Facebook. You’ll need to figure out a payment system but most people have PayPal and that would be a good starting point.

As for getting deals, this should be a relatively easy process if done correctly. I am not sure of how things are done locally but the advertiser pays absolutely no upfront costs with Groupon. You only have to commit to a discounted deal to X number of customers. Groupon keeps half and you receive the other half of the money collected. It makes sense if you’re struggling to get people in the door because you pretty much have guaranteed results unlike print or radio advertising. If it doesn’t work or you don’t gain any customers from your deal, you haven’t had to pay a dime.

Lastly, the group buying business model is the hot thing right now. Everyone claims they are going to do it better, get better deals and more advertisers then Groupon does. I believe there are local companies that actually are. It’s one thing for companies to hire local sales reps for a parent company and its entirely another for a local media outlet to open their own group buying website, promote through their own product and have their sales reps sell it as a value added feature to their existing customers.

It will be interesting to see how many of these new major companies gain the traction necessary to be successful and how much venture capital will be burned in the process.

If you have a success or failure story with Groupon or any other group buying websites either as a consumer or a business, please leave your comment down below. If we get some great stories, I will compile and share them in the future.

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