Groupon: the secret psychology
Researchers in Canada's University of Toronto have worked out just how Groupon and other social buying sites work - it's as basic as herd mentality, in which we feel increasing pressure to buy stuff as more people join in. According to the University's Rotman School of Management this is behind the success of Groupon, Living Social and all of the other group buying schemes which have been so successful lately.
The researchers suggest the time limited element of these group purchases is crucial to whipping everyone up into a frenzy, as is telling people how many have signed up for the deal so far.
This is actually not unique to group or 'social' buying, however. Any auctioneer, particularly the online master eBay, will confirm that limiting time and the number of people who can have an item will lead to a glut of last minute bids.
Before any entrepreneurs rush into it, though, there are a number of things to bear in mind about what works and what doesn't:
- Many people assume that the buyer of the lower-priced deal will be back at full price so the offers act as loss leaders. This may not work; if you see an offer for a bespoke suit from a Savile Row tailor for £480 this doesn't mean you need two, nor that you will be back when they cost £2000+.
- People have been caught out by unconsciously going downmarket with their offers on these social buying schemes - one hairdresser in Manchester found an entirely different clientele coming to her salon when her £180 treatments were reduced to a third of that price.
- More successful was the woman offering digital photography classes, when the cost to her per student went down the more the numbers increased so she made a profit even on the discounted price.
- Others have been caught out by underestimating the likely demand - one baker was widely reported in the press as having to outsource her cake making in order to fulfil unexpectedly large orders; another, however, interviewed in my book (see below) forecast the likely impact of social media and group buying accurately and therefore did very well out of her promotion.
These hints and examples are taken from blogger Guy Clapperton's new book, "This Is Social Commerce", which came out this month.