Group Purchasing: The next big idea in social commerce has to be more than a deal a day

April 29th, 2010

By Jim Tobin

lots of cars

A woman in China wanted to buy a car. As is true in almost any marketplace, you get a better deal if you can buy in volume. So she listed her intention on a large Chinese social network and asked if anyone in the area wanted to go into a local dealership and buy the same car. Maybe, she reasoned, if we buy two, we’ll get a better price.

Two weeks later, 55 people walked into that dealership and bought 55 cars.

That, I think, is the real potential for group purchasing. And it has potential to radically transform commerce in the United States.

More than Groupon, Living Social or Twongo

Groupon logo
Today’s hot group purchasing websites are Groupon, Living Social and Twongo. They are raising good venture capital and doing the very difficult work of localizing specials. They’ve got a lot to do, and they’re executing quickly, so I’m not diminishing their work. In fact, one of my colleagues here at Ignite Social Media will be writing a post about them shortly.

But when you break it right down, they’re just local Woot. A deal a day. Take it or leave it. Good business model for them, sure, and I love Woot, too. But what about the vast array of other things I need to buy that don’t happen to be one of these daily specials?

I’m a big fan of the potential of social commerce, as I discussed in my post on Mashable earlier this month which outlined the battle between Facebook and Google to be our default social profile. Group purchasing as part of social commerce has significant potential for someone to make a lot of money by making our lives easier.

The eBay of Group Purchasing
What we really need is a new “eBay” of group purchasing– a facilitator of true social commerce. A site that allows me to gather with people in my local community and band together to make major purchases, like cars, computers, couches (and presumably other things that don’t start with a c). Let’s call this company GroupCo at this point. Here’s how it might develop:

Phase I, Group Facilitation: In the early days, GroupCo would simply put us together around a particular item and a particular location. “I want to buy a new Ford Explorer this month in Raleigh, NC. Anyone else want to go with me?” This increases negotiation power, but it’s still up to the individuals to meet up at the dealership and negotiate, then handle their discounted purchases individually. Powerful in its own right, but there’s so much more it can be.

Phase II, Group Negotiation: While walking into a dealership with a dozen people ready to buy will no doubt increase your bargaining power, why not put those dealerships to work prior to showing up? If there are six Ford dealerships in the Raleigh area, why not have them compete with their best offers prior to sending the buyers their way? Now the transaction speed is increased, and everyone can be sure they have a good deal prior to making the buy.

Phase III, Procurement and Purchasing: With the success of Phases I and II, GroupCo now has significant power to work deals. Assuming this model works best for large purchases (who wants to go to the hassle for a loaf of bread?), why not buy directly through that company? Now the dealership is making one large sale to the company, and the company is collecting the payments from the sellers and providing the goods. For smaller purchases, credit cards would be charged by the new company, but as firms like GMAC have taught us, there are huge amounts of money to be made through financing programs. Get me the best deal and a great rate on that purchase, and we’re good.

Phase IV: Direct Distribution: Manufacturers offer their wholesale prices to companies that buy large quantities. Once our new company has built up scale, why go to the dealership, or the furniture store or the electronics store at all? Why not aggregate the purchases, and buy them directly from the manufacturer? This would offer the lowest possible prices, and create a retailer with incredible influence on the market. They could rival Walmart in terms of influence on the market relative to prices. It would be highly disruptive to certain channels selling high end goods, but the benefits to consumers are potentially enormous.

Who Can Do This?
Certainly the leaders in group purchasing right now are the firms I mentioned earlier: Groupon, Living Social and Twongo. At least two are raising significant amounts of venture capital, while the third is growing quickly. That may leave them in the best position early on to achieve this.

These businesses may become distracted by buidling sales forces in each market as they drum up deals of the day from local restaurants. They may build a good business but out on the potential to build a great business. In that case, I’d look for a startup out of nowhere, a Craig’s List, an eBay type firm, to take this concept, and build it out. After all, it doesn’t take much to build a system to handle Phase I. It doesn’t get really tricky until Phase III.

So if you’re the one who builds this, and if this post was any sort of inspiration, a seat on the board of directors would be pretty awesome. Oh, and I’d like to get a really good price on my next Ford Explorer. Think you can hook up me and 54 of my closest friends?


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