The explosion of group buying websites

Like the number of websites popping up, my addiction grew quickly - starting with a haircut (down from $115 of value to $39, nice), then 10 zumba classes for $30 (awesome!), cut-price meals, yoga, dance classes, movie tickets, a circus show and even a trip for a laser zap at a hair removal clinic (I gave the colonic irrigation deal a miss).

The idea behind the sites is that group buying power enables bigger discounts - and the 'deal' is activated once a certain number of people purchase on that day.

Always a fan of a bargain, it seemed I had stumbled upon the greatest thing ever to happen to my social life, sporting life and beauty regime - apart from The Entertainment Book of course, but that’s another story.

Friends reported similar addictions, snapping up massage deals and meals with gay abandon.

But I always wondered - how could they possibly be selling stuff this cheap, and were the businesses featured actually making any money? And was I actually not saving money, but becoming a shopaholic?? I decided to find out.

A hairy deal

I began by speaking to Jodi Payne, of South Melbourne’s Miyabi Hair & Body, who offered three months of unlimited waxing for $99 through Jump On It last October - value $605.

A beauty therapist for 15 years, Payne started her own show about a year ago, and saw a one-day deal as ‘‘an opportunity to get a few new clients introduced to the salon’’.

But she sold more vouchers than she bargained for - 201 in total.

‘‘We didn’t know we were on until we got to work and there were 36 answering machine messages,’’ she said.

‘‘I went in there wanting about 25 clients. I just needed to fill some spots during the day.’’

Running the business solo, Payne suddenly faced a never-ending mountain of hair removal.

Jump On It, which says it takes a different cut depending on the deal and the amount of vouchers sold, took 50 per cent of each sale in this case. The percentages differs between the sites, but Cudo also takes 50 per cent.

‘‘At the start you don’t really begrudge them (Jump On It) taking 50 per cent off the top. It would cost you a lot of money to get a successful marketing campaign.’’

But Payne, who has been working 80 hour weeks since October to meet demand, now describes the experience as ‘‘career suicide’’.

‘‘My earning potential ... halved, we don’t have time to look after (regular) clients.’’

While Payne says the idea is a good one, she says businesses should be wary of what they’re taking on, and limit their offers. ‘‘It’s too cheap - we gave away way too much.’’

Many of the vouchers are still being used, but Payne doubts she will get much repeat custom.

‘‘There’s no reason why people shouldn’t come back but these people you attract will go on to the next deal,’’ she says. ‘‘I think it’s a very different demographic of client - people just chase the specials.’’

Some positive pampering

Denise Joyner, owner of Melbourne’s Cosmetician Studio College of Beauty, had a much better experience on Jump On It. She sold 860 vouchers - $39 for a three-hour pamper package - last November.

‘‘It hasn’t been a fantastic money-maker for us. At the same time we’ve had a lot of people that come through the doors who didn’t know us,’’ Joyner says.

‘‘It’s been really, really good for us. In retrospect I think if I was to do it again we would put a limit on how many.’’

But at just under $20 going to the business for each three-hour package, after the website’s cut, how could they be making any money?

Treatments were carried out by students of the college, so labour costs weren’t an issue, says Joyner, with the students happy for the extra experience.

‘‘The money comes from getting them (customers) in the door and selling products and re-booking them.’’

Joyner said a minority of people who bought the vouchers were unhappy about the fact it was difficult to get an appointment.

‘‘At the end of the day I think that if you were to buy a voucher like that I’d understand the business has been inundated,’’ she said.

Phone inundated

Adam Jacobs’ mobile phone rang about 500 times in the first four days after his business’ bootcamps were featured in a daily deal on Spreets this month.

He had been warned that sales could be huge, but was staggered when they sold 544 vouchers. The deal was a six-week bootcamp for $29, valued at $240.

‘‘We were rapt with what we got, I think we were expecting maybe 200,’’ he said.

The business, Ajax Personal Training - which employs another three trainers and an administration person - struggled to cope in the first week, but set a process in place for dealing with overstretched bookings.

‘‘The main thing is you need to understand that your volume is going to be astronomical. If you offer a good enough deal you’re going to be absolutely inundated,’’ says Jacobs, who is still receiving up to 50 emails a day.

He said it had given his business a ‘‘massive shot in the arm,’’ especially in lifting its profile.

‘‘We made some money but all our money was used to accommodate the extra demand,’’ he said.

‘‘We were in a position where we could fill up classes that weren’t doing as well.’’

He said boot camps had been going through a quiet period because of Melbourne’s ‘‘weird weather’’ and an onslaught of mosquitoes.

Ups and downs

The group buying market is the fastest growing sector in online retail, with turnover expected to rise 284 per cent from $63 million from last year to $242 million this year, according to a study released by telecoms, media and ICT analyst firm Telsyte this week.

The study found four sites - Spreets, Scoopon, Jump On It and Cudo - represented 79 per cent of the industry’s revenue. The sector employs more than 350 people - expected to more than double this year.

Grant Arnott, chairman of the Online Retailer Conference, recently described group discount buying websites as ‘‘rivers of gold with no downside’’ for their owners.

‘‘Build a virtual audience, offer a virtual deal funded by a third party, and collect a hefty commission on every sale,” he said.

One risk is that businesses may underestimate the impact of such a huge demand at discounted prices, he said.

Spreets CEO Dean McEvoy says the businesses get massive promotion, through ads on TV, print and online, and through Facebook and Twitter.

‘‘It’s a huge amount of money, time and effort spent,’’ he says of his business, which started last February and claims to be the first of its kind in Australia.

The site’s phenomenal growth took him and co-founder Justus Hammer - who sold the site to Yahoo!7 for $40 million earlier this year - by surprise.

‘‘We definitely underestimated how fast it would accelerate and what the growth would be like,’’ he said.

‘‘I think there’ll be consolidation, people will specialise in different areas.’’

Spreets has 55 staff, but expects that to double within the next six to 12 months.

What to look for

Mr McEvoy says more than 700 businesses ask to be featured in a daily deal on Spreets every week, but ‘‘very few’’ inbound leads wind up there.

‘‘It’s got to be something that’s interesting to consumers. Our business is about giving people a reason to try interesting things in their city.’’

Spreets sells a range of deals including vouchers for restaurants, day spas, experiences and events.

Mr McEvoy says businesses need a solid website and reputation - ‘‘check your online reviews, check what people are already saying about you’’.

He says his staff get businesses to think hard about the volume they can handle.

‘‘A lot of them aren’t used to dealing with advertising mediums that actually work,’’ he says.

He says businesses should compare the sites to make sure they’re reaching the right demographic.

Seventy-five per cent of customer on Spreets’ database have bought two vouchers or fewer.

Colin Fabig, CEO of Jump On It and partner website Living Social, says their customers want them to ‘‘surprise them with new stuff each time,’’ and that could be experiences like salsa dancing or skydiving - not products.

Last December, the site sold 50,000 $1 Strike bowling vouchers in a single day. Jump On It began operating last May.

Fabig says the main thing for businesses to realise was it wasn’t about making a ‘‘quick buck’’.

‘‘That’s not the point. If they’re thinking that way they’re probably going to struggle.

‘‘Our job is to bring people to the door. Their job is to make sure those people become repeat customers.’’

Fabig says his website always speaks to businesses about their capacity, and sets an upper limit on vouchers sold.

‘‘If the business is really full, there’s no point really in coming to us,’’ he says.