Six Pixels of Separation - The Blog
May 27, 2010 7:13 AM

One Product. One Sale. One Day Only. One Exciting New Business Model

Do you buy in bulk?

When most people think of buying in bulk, they think about Costco. They think about saving a handful of shekels by buying a six-litre jug of Italian salad dressing. Either that, or they think about buying enough AA batteries to the point that there's not enough room for the butter on the upper inside door of the refrigerator. Buying in bulk doesn't have to look so sloth-like anymore, and there's a whole other side to buying in bulk that has nothing to do with 10-pound bags of Doritos.

One of the main promises of the Internet and Web-based technology was/is the ability for the collective to come together, collaborate and be more organized and efficient in how we do things ... and there's no reason why saving a few dollars shouldn't be a part of that equation.

During the dot-com boom, there were many start-ups (that got millions of dollars in venture capital) to figure out how to find masses of people and get them interested in buying the same thing for a better price (remember websites like MobShop and Mercato?). Think about it this way: you're looking to buy a top-of-the-line bicycle, wouldn't it be great to find nine other people who were looking for the same brand, model and make? This way, you could approach the company and ask them if they would be interested in offering a discount for the 10 purchases? If the brand isn't interested in your business, you can put out a message on the Internet and see which brands might be?

There were many issues with this model: It was always hard to find the right number of people to know when a company would be willing to give a discount, if the people all lived in different parts of the world, and if the shipping and duty would be different. Then there's the small issue of letting both individuals and brands know that these platforms exist and that they should be monitoring them (remember, this was all pre-online social networking with channels like Facebook, Twitter and blogs for individuals to reach out to their social graphs).

Things have changed since the mid-'90s, and the Internet has evolved to the point where these types of transactions are a little bit more practical and realistic.

It has also been the very successful business model that has made Groupon one of the newer (and hottest) Internet darlings. The company launched in November 2008 and stays true to its ethos, which is this:

  • Each day it features something cool to do at an unbeatable price.
  • You only get it if enough people join that day ... so invite your friends!
  • Check back the next day for another awesome Groupon!

How's that for a fascinating business model? One product/service only.

There is no catalogue. They are no product skus to deal with it. It is something that Groupon, personally, does not hold inventory on. It is driven, entirely, by the consumers' desire to buy and get their friends to buy along with them. The biggest difference in the Groupon model (and this is the key part) is that the website is offered in a variety of cities across the United States and Canada). It is location-specific and not open to anyone, anywhere online.

That is where the new Internet is able to beat the old Internet.

We now have more than enough people online (approaching the 2-billion mark) and many of them are actively looking for products and services at the local level (just ask the Yellow Pages Group). If that doesn't sound like a big deal to you, check out this quote from an April 12, 2010, news item on TechCrunch (Groupon Raises Huge New Round at $1.2 Billion Valuation): "Fast-growing Groupon, fresh off a $30-million round of financing that valued the company at around $250 million, is back raising new money. They have closed or are in the process of closing new venture money at a $1.2-billion valuation, say multiple sources (one source says that's not exactly correct, but close). ... The site has accumulated 3 million subscribers and currently manages roughly 40 markets. Three million 'groupons' have been purchased since November 2008, says the company."

The success of the Groupon model is also something that has not fallen on deaf ears.

There have been multiple companies that have tried to replicate the Groupon model both on a local level (in cities and countries where Groupon presently does not have a presence or to compete with them directly) and based on a specific category of product. Gary Vaynerchuk, the founder of Wine Library TV (a video Podcast about wine), used his growing Internet celebrity status to convert his 850,000+ Twitter followers and fans into a best-selling business book, Crush It, and beyond. His latest venture, Cinderella Wine, is a Groupon-like e-commerce site where he has one amazing wine offer every day until the inventory runs dry (so to speak) - granted, the deal happens by simply making the purchase, which is unlike Groupon, where enough people have to join the specific "groupon" to make the deal a reality.

Woot! is another similar site that offers one product for one day only (or until it runs out). Woot! has been around long before Groupon and has always focused not just on getting the one product out to as many people as possible, but also on the community side of engaging their consumers on blogs and podcasts as well as on platforms like Twitter and Facebook.

The Groupon, Cinderella Wine and Woot! commerce model seems ridiculous (and, if it does, please re-read that TechCrunch quote above).

While most retailers focus on diversifying their product lines and maximizing the cost-savings to their consumers, Groupon (and companies like it) are rewriting the retail rules by leveraging everything from technology and social media to consumer empowerment and the local angle to create a win-win for both paying customers and businesses. Could you ever have imagined a company selling one product, for one day only at a heavily discounted price being worth billions of dollars?

Welcome to the new world of retail.

The above posting is my twice-monthly column for the Montreal Gazette and Vancouver Sun newspapers called, New Business - Six Pixels of Separation. I cross-post it here with all the links and tags for your reading pleasure, but you can check out the original versions online here:

By Mitch Joel


Comments Comments Feed
  • Posted by Ken Honeywell
    Mitch Joel

    Pretty amazing, Mitch. Interesting to see how the ol' World Wide Web has become increasingly valuable for very local commerce.

    Reply
  • Posted by Ryan
    Mitch Joel

    I just wanted to let you know that your Groupon link is NOT redirecting to their site.

    Reply
  • Posted by Josh Muirhead
    Mitch Joel

    This is serendipity timing, as just yesterday morning I received an email from Mac Heist.

    Personally, I would not have thought this possible until my first experience with the Heist bundle. Here was a group of people, offering great software at an unreal price. The only catch was that to get more for the same amount, more people needed to purchase. Well trust me, I made sure every person I know who could benefit from their software was informed.

    Thanks for sharing
    Josh

    Reply
  • Posted by Michael Cooney
    Mitch Joel

    This is the second time I've heard Woot mentioned in a week. In another post someone used them as an example of really creative business writing, I just visited their website I have to say they have serious writing talent there. I'm not someone who signs up to everything, but I like their style and just signed up.
    Mitch, your writing is also awesome, you always give us real, relevant and valuable content that makes you think.
    The only problem is that you give me so many good ideas I can't find time to apply them:)
    Thanks
    Michael Cooney

    Reply
  • Posted by jeremy morris
    Mitch Joel

    "They have closed or are in the process of closing new venture money at a $1.2-billion valuation"

    Did somebody say BUBBLE?

    Reply
  • Posted by Lori Dyck
    Mitch Joel

    I've always loved the global reach of internet marketing... but am loving the local reach even more!

    Reply
  • Posted by Colin Faulkner
    Mitch Joel

    Very interesting stuff Mitch. I recently wrote a blog about this concept of "organizing customers": http://www.colinfaulknerblog.com/2010/05/11/how-to-organize-customers-and-sell-more/ The internet is such a powerful tool for stuff like this. Keep up the great work. Love your blog. -Colin

    Reply
  • Mitch,

    I agree with you on this one. There is also a big opportunity locally. There is something in my home town (friends of mine) called Hot Sauce which is a restaurant Deal Of The Deal with a few spins including 10% going to charity and they take a flat fee per transaction.

    Here is an overview of the model: Hot Business Trend: The Deal Of The Day Model http://bit.ly/cnpZlX

    Reply
  • Posted by Srinivas Rao
    Mitch Joel

    Mitch,

    Personally I think Groupon is one of the smartest business ideas to come out of the Web 2.0 economy. If anything Groupon has taken advantage of the recession by solving problems for all the parties involved. For the consumers who have been reluctant to spend they've reduced the cost of going out to eat and enjoying other things. For the restaurants and other establishments that use Groupon they are actually helping drive business to them at a time when those establishments have been struggling. Overall, I think Groupon is one of smartest ideas of the last 5 years.


    It also makes me wonder if we'll start to see a resurgence of group buying in other categories.

    Reply
  • Posted by Chris Schmidt
    Mitch Joel

    Mitch,

    I have been following your blog for a few months now, and I enjoy reading the insights that you have to offer. I also read Six Pixels of Separation, and I am preparing a blog post for it to publish on Monday. The book was amazing and just as helpful as your blog. I was wondering, if you would be interested in doing an informational interview with me? I am trying to get advice on the marketing industry and how it works (have my degree in marketing still try to get that 1st job).

    You can send me an email if you would like at c.j.schmidt@hotmail.com.

    -Chris

    Reply
  • Posted by Tim
    Mitch Joel

    Hey Mitch,

    We just graduated our next startup, Dealo.com, from alpha to beta: http://www.dealo.com

    Dealo provides a software-as-a-service platform that allows anyone to launch their own, all inclusive, online "One Deal at a Time" ecommerce store, and sell anything, products or services, one deal at a time. Etailers, manufacturers, distributors, wholesalers, brick and mortar retailers, ebayers, and service providers can use the "One Deal at a Time" model to introduce factors that motivate individuals to act on an opportunity, including scarcity and social proof.

    As you know, you don't have to spend much time on TechCrunch, The Business Insider or This Week in Startups, to realize that the "deals space" is huge. Private Sale, Flash Sale, Group Buying and ODAT are stealing the headlines, and the VC funding, by the hour.

    Let me know if you're interested in chatting about Dealo; I'd be glad to show you a demo.

    All the best,

    Tim

    Reply
  • Posted by Mike Quinlan
    Mitch Joel

    I am having a hard time getting my brain around this one. This is very similar to coupon card promotions that were around in the 1980s and 1990s. Basically a marketing firm would approach a business and offer to set up a promotion for them at no cost. They would then print up a card, and hire students to go door to door to sell them. Not a bad business model, get a business to provide the value, print a 1000 cards for $300, sell them for $30 each, and in a perfect world gross 29,700 less whatever commissions he pays the student sales staff. The goal for the participating business was always to bring in new customers and grow the business, but it never quite worked out that way. The reason being is that customer who buys the promo does so either because they are an existing client ( its easier to sell a restaurant deal to someone who already knows and likes the place), or the customer who buys it is very price sensitive and not likely to become regular full price paying client. It may have cost the businesses at the time nothing in upfront costs, but the truth is there will be fairly large promotion costs down the road when the discounting applies. The other thing is that a deal a day is rather limiting. If the promotion works well then the business giving it may well want to do it more. Example a tanning salon or restaurant usually find it profitable to increase sales during their slowest times, but what happens to Groupon offers when competitors will offer the same discounts or better for free? The group buying angle is a fiction. I looked carefully at a few of the cities and the offers run, and they are standard style promo offers, usually for products or services with low fixed costs. That said the psychology of it is good and I think the Groupon concept is brilliant at leveraging the social media actions of its adherents. Of course that means its also at their mercy. Curious how it will turn out.

    Reply
    • Obviously, this is a very business. Look at the numbers regarding Amazon acquiring w00t and it was just announced today that Groupon will be the fastest business ever - in the history of civilization - to reach 1 billion dollars in sales.

      Reply
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