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Group buying: The economies of scale

Collective-buying sites offer low prices, but there's plenty of fine print.

By Karen Datko Feb 22, 2010 12:55PM

This Deal of the Day comes from Kelli B. Grant at partner site SmartMoney.

 

Get enough people together and you can leverage discounts of 50% or better on spa services, dinners out, yoga classes, event tickets and other services.

 

The key concept here is “enough.” Group-buying sites have carved out a niche promising deals if more than a set number of people opt in during a short window of opportunity. The idea works great when supply and demand line up: In Denver, for example, BuyWithMe.com recently offered a two-month unlimited membership to Yoga on 6th for $50 instead of $400. All it took to secure the 88% discount was 15 people signing up. (They did).

From there, supply expands to meet demand. When Groupon.com offered New Yorkers $50 worth of groceries from delivery site FreshDirect.com for $25, just 125 people needed to sign up to activate the deal. Before the window closed, 3,992 had, and all of them qualified for the offer. (Alternatively, of course, if the minimum number of takers goes unmet, then no one gets the deal.)

Such collective-buying sites aren’t exactly new, but the business model has taken off in recent months due to the struggling economy, says Jack Vonder Heide, president of Technology Briefing Centers, a technology research firm based in Oak Brook, Ill. Businesses hurting from consumer spending cutbacks are using such sites to beef up traffic and fill empty spaces. “They have full-time staff members that many times during the day are idle,” Vonder Heide says. Extra business at a deep discount is better than none at all -- especially if some of those customers come back to pay full price later.

 

Here are tips on how to find the best group-buying sites and what pitfalls to look for.

 

Sign up for e-mail alerts. You can’t take advantage of the deals if you’re not on the e-mail list. Consider signing up for a sampling of sites in your area:

Not ready to sign up? The site 8Coupons.com aggregates all the local group-discount deals by ZIP code.

 

Compare prices. Don’t assume the buying site’s offer is the best one out there, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. Look for coupon codes, discount gift certificates and other specials that might better fit your needs; for example, a package deal at a spa.

 

Wait to buy. Many deals last a mere 24 hours, a limited-time-only approach that can lead to impulse buys. “If you don’t need it, it’s not a good deal,” Cunningham says. Resisting the urge to buy as soon as the deal shows up in your morning e-mail forces you to think about how (and if) it fits in with your budget.

Worried that you’ll miss out if there are limited numbers? Some companies, including Groupon.com and LivingSocial.com, let you back out of a pledged purchase before the deal closes. Write a note or text reminder to reassess before that time.

 

Don’t get your hopes up. Saying you’re in doesn’t mean the purchase is set in stone. Sometimes there just aren’t enough interested people for a deal to go through, says Andrew Mason, chief executive of Groupon.com. A recent Chicago offering for a Michael Jackson tour of Gary, Ind., failed to get the needed 20 slots. “People love Michael Jackson,” Mason says. “They just don’t love him enough to visit Gary, Ind.”

 

Read the fine print. In most cases, there’s a limit to the number of items you can purchase, for yourself and as gifts. Even if you’re allowed to purchase multiples, you’re allowed to use only one per visit, says Alan Garcia, a co-founder of SocialBuy.com, a luxury-focused group-discount site. But the local business may set other restrictions as well. Some industries, notably salons, restrict use to new customers. At restaurants, tax and tip aren’t included -- and a few also cut out alcohol.

 

Alert your friends. Discounts may improve if you bring a few more friends into the deal, Vonder Heide says.

 

Tippr.com incrementally increases the value of its vouchers based on the number of people who sign on. For example, a recent deal for Seattle users offered a buy-in of $25 to get $45 to $55 at restaurant What the Pho! LivingSocial.com lets you alert friends via e-mail, tweet and Facebook to deals you bought -- if three or more follow the link and buy in as well, your purchase is free.

 

Make an appointment fast. Group discounts can work against you if a large number of people sign up for the deal. Sites say they work closely with businesses to ensure they aren’t offering more vouchers than there are, say, open hairstyling appointments. But having the voucher doesn’t guarantee you a convenient reservation or appointment. If there’s a problem, reach out, says Tim O’Shaughnessy, chief executive of LivingSocial.com. The site works with customers and businesses to work out a solution, whether that’s more flexible terms, an alternate discount or a refund.

 

Avoid scams. With so many group-discount sites popping up, it’s important to check the reputation of the company before you hand over any personal or financial information, says Allison Southwick, a spokeswoman for the Better Business Bureau. Check for complaints at BBB.org, although a new business is unlikely to have a record, she says. Follow up with an online search for the site name and “scam.” “In this day and age, if someone gets ripped off online, they’re going to shout about it,” she says.

 

Protect your financial information further by making sure the site address starts with “https” instead of “http” on the checkout page, meaning it’s secure. Southwick also advises paying with a credit card instead of a debit card. Credit cards offer stronger protections if the site turns out to be fraudulent, or if there are other problems with your purchase.

 

Related reading at SmartMoney:

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