Commentary
Groupon Is Nice -- But When It Comes To Group Buying, Costco Is King
- by dave.b , Max Kalehoff , July 2, 2010
I recently attended a great technology event organized by Battery Ventures, a West Coast venture capital firm. The theme of the event was monetizing the location-based Web. Not surprisingly, group-buying services were a hot topic. Discussion was amplified by the presence of Andrew Mason, founder and CEO of Groupon, a deal-of-the-day Web site, empowered by group buying localized to major markets.
Groupon is on a tear with its flash fire sales, as evidenced by rapid U.S. expansion and recent fund-raising that values the start-up at over $1 billion. Its success has prompted an industry of other group-buying Web sites, and renewed excitement around the general category of group purchasing. Indeed, VCs are all over these start-ups.
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Groupon is great, and I recommend you try it out. It's is a fun, quirky daily email with an uncanny ability to spark the consumer instinct in all of us. Ever turn your head while driving past a going-out-of-business sale? Groupon subject lines have the same impact on me when they arrive in my email inbox.
Groupon is an exciting story, but group buying wasn't invented yesterday. While unsexy, dorky and perhaps wreaking of suburban tendencies, my favorite group-buying phenomenon is far larger and more impactful. It's called Costco.
According to Wikipedia, Costco is the largest membership warehouse club chain in the U.S., and one of the top three retailers. In existence for over a quarter century,
Costco sells products at low prices, and often in bulk. It does not carry multiple brands of the same product, which results in mores sales from single vendors, enabling further price reductions. If
Costco feels the wholesale price of a product is too high, it will refuse to stock the product.
Moreover, Costco has built one of the best private-label brands in history -- embracing products with quality higher than most mainstream premium brands. That high standard forces competing mainstream brands to work harder to prove their value. Costco's bargains are also enhanced by a worker culture that is universally motivated to delight its customers (or buyers).
Costco sends me hot deals via its email newsletters. I open those as fast as I do the ones from Groupon. While the types of deals are different than Groupon's locally based ones, they're often still outrageous, usually more relevant, and always more plentiful.
That's group buying power for the people!
I like Groupon's copy style but the offerings for NYC, where I do not live but visit a lot, are often not of interest. I score better with the local Raleigh version and have stocked up on many of their offerings. But, far and away Costco is our go to spot for EVERYTHING from gasoline to toilet paper. Multiple visits per week. Nothing compares to Costco.
“Costco sends me hot deals via its email newsletters.” Email still remains the perfect vehicle for marketers. Cost effective, immediate and relevant, it is welcomed by every subscriber. As we continually build, clean and update clients email records, developing an online relationship with your company or organization's members, customers, donors, advocates etc. is a proven tool.
I think you're missing an important distinction. Costco is old-school co-op. They invest in what they think their members will buy and leverage their bulk against the wholesaler. If they bet wrong, they lose and have to make it up somewhere else. It's a fine model that has worked and will continue to work for years.
The GroupOn model is different in that no money changes hands until a predetermined number of buyers actually step up and commit their dollars. It works incredibly well for the small, local retailer who can set price/volume decisions up front.
I suspect and hope we'll be seeing more of this model now that technology has made it possible and social media has moved it toward a tipping point.
Full disclosure: My company has just entered into an agreement with Groupon, as you may have heard.
Groupon will need to localize more. A whole lotta' people will get bored with offers that are not so good, mostly services in areas not convenient (a one time discount offer walk in does not a good customer make). There is a tiring factor here.
In a sense, Groupon enables a 'crowdsourcing' of deals that lets smaller merchants, as a group, have a way to compete with the Costco giant's 'group buying'.
A good thing. My opinion, we need small businesses that are niche and innovative. We don't want to devolve to one big-box life, although a Costco is certainly a nice part of a good life.
Further, Groupon has a chance to grow to the point where the offers are plentiful enough to enable targeting (meaning, relevancy to the user) and that will be a good thing, too.
I just heard about a new service. www.discountmycity.com that is going to launch soon. From what I hear it will be much better for the consumer and the merchant than groupon. The promise to give a percentage of what all your referals spend on the site FOREVER. I guess we will have to wait and see.