Online group-buying schemes such as those operated by Groupon, LivingSocial and Pigsback have drawn purchasers in their thousands – but just how much of a bargain is too much, and where do the retailers stand in the scrum to the virtual till?

WHEN PAT WHELAN was on holidays over the summer, he spent part of the time glued to his computer. He had signed up with group purchasing website Groupon to promote his online butcher shop, jameswhelanbutchers.com, with an expectation of selling maybe 300 vouchers, which entitled the purchaser to €42 of meat for just €20. As he sat in front of his computer however, he saw voucher after voucher being purchased – within 24 hours he had sold a staggering 1,300, generating a whopping €26,000 in revenue overnight.

At a time when retail sales are in freefall, group purchasing has become a global phenomenon. Groupon, one of the pioneers of the business, now has more than 115 million global subscribers in 45 countries who get deals emailed to them everyday, ranging from horse riding lessons, to spa treatments, to handymen services, to hotel rooms. It sold more than 32 million vouchers in the second quarter of this year and Forbes magazine described Groupon as the fastest growing company in web history – faster than Facebook, eBay or Amazon. Last year, a $6 billion deal with Google fell through on apparently competition concerns, but the company now has its eye on a $15 billion public offering.

And the Irish market is no different. Driven by Groupon and the other major international player, LivingSocial, Irish consumers seem eager to participate in deals. According to sift.ie, which aggregates all the deals offered in the Irish market, almost €4.5 million worth of vouchers were sold in August, a 35 per cent increase on July which in turn was a 27 per cent increase on June. If this growth rate continues, it’s going to turn into a €60 million annual business.

Unsurprisingly, the number of deal operators in the Irish market is also growing at an exponential rate, with Pigsback, GrabOne, Menupages, boardsdeals and The Irish Times through its rewardingtimes.ie portal, just some of the names now operating in the space. Google is expected to launch its effort shortly, while Facebook Deals launched on a trial basis in Ireland in March.

“It fits the bill for the times,” says Michael Dwyer, managing director of Pigsback.com, which launched its own version, Mega Deals, in August 2010, pointing to the significant discounts offered by such sites, sometimes of as much as 90 per cent.

“We couldn’t leave it go by; by all accounts it’s a market that’s growing very, very rapidly,” he says.

But is the popularity of such deals simply a passing fancy or are they going where so many have tried but failed in recent years – to make serious money from online advertising?

The concept behind so-called group purchasing sites is that, by getting a certain number of people to purchase a good or service, the supplier can offer substantial discounts. So a hotel, for example, can offer rooms at more than 50 per cent off the rack rate or a restaurant can offer discounted meals.

For the consumer, it’s a bit of a no-brainer as you’re promised savings of up to 90 per cent on the deals, which can be for almost anything – in fact, a Teaching English as a Foreign Language (Tefl) course was one of the biggest sellers in August, according to sift.ie, with 1,500 voucher sales bringing in €125,000 in sales.

It’s also attractive for small businesses because it enables them to advertise on the internet – without incurring any marketing costs until the customer comes in the door. Moreover, you’re guaranteed a semi-captive audience, as the deals are e-mailed to subscribers every day. Groupon is understood to have some 600,000 subscribers, while Pigsback has almost 250,000, and LivingSocial, which entered the Irish market about eight months ago, now has just over 400,000 subscribers.

But more than this, daily deal sites can offer local businesses something they can’t get elsewhere – guaranteed paying customers.

“It’s the future of local commerce. It’s the first time in marketing history that a company can promote itself and is guaranteed that customers will then enter their business,” says Peter Briefett, managing director of LivingSocial for the UK, Ireland and The Netherlands.

But if this sounds too good to be true for small businesses, there is a catch. While Whelan in the aforementioned butcher story may have generated €26,000 in overnight revenue, he never got to see half of this as it is kept by the deal operator. So small businesses can’t always expect to make money from the deals. As Whelan notes, you must entice customers with a “heavily subsided offer”.

Take the example of a restaurant which offers €80 to spend on food and drink at the restaurant at a cost of just €40. Based on the typical business model, the voucher operator could expect to pull in €40,000 from the deal if it sells 1,000 vouchers, half of which must be handed over to the restaurant. So, a restaurant will only make €20,000 for giving away €80,000 worth of services.

Nonetheless, while Whelan was overwhelmed with the reaction to his deal – and had to extend the offer to three months to cope with the demand for his meat – he found the overall experience “fantastic”.

“We were delighted to see the opportunity so well received, it did us no harm at all,” he says, pointing out that while the voucher may have been for €42, the average spend actually ended up being about €86.

This is another great selling point of daily deals – the “upspend” possibilities.

“[Businesses] shouldn’t be losing significant money on the deal, and should be making money on the upspend,” says Dwyer. Briefett concurs, noting that among LivingSocial customers, a typical upspend is of the order of 60 per cent.

However, this is not always the case, and as many web forums will attest to, daily deal customers can be a bit on the mean side, as Joe O’Flynn discovered.

General manager of Rathsallagh House in Co Wicklow, O’Flynn got a great response – if not a too-good response – when he launched a deal in his hotel last October.

“We were a bit naive. It had just started and we didn’t realise you could put a limit on it. We had gone over 1,300 before we knew what had hit us,” he recalls.

He has mixed feelings on his experience. A 29-room hotel, O’Flynn found the discount offered on Groupon too steep – €99 for bed and breakfast compared to a rack rate of €220 – particularly when at least 40 per cent of this was kept by Groupon.

And the much vaunted “upspend” never really materialised. In the hotel business you can typically expect that residents will spend up to 1.6 times the cost of their hotel room on ancillary services in the hotel, such as dinner, drinks, spa treatments and so on. However, this was not to be.

“We found that that didn’t work out at all,” he says, adding that one voucher customer actually ended up ordering a takeaway from the local village and eating it in their bedroom, rather than eat in the hotel.

But when looked at in the context of an overall marketing budget, or as a loss leader to bring in customers, O’Flynn is more sanguine about his experience, noting that the deal introduced a new audience to the hotel. Moreover, many made the most of it, with some wedding proposals on the night of their stay, which in turn have even led to a number of weddings being booked in the hotel.

But would Whelan and O’Flynn use a daily deals site again to promote their business?

While Whelan “certainly would be inclined to do it again”, he has concerns about the seamlessness of the technology used. Moreover, he wants to see whether or not the deal customers come back.

“The money won’t be made until you see the repeat business. I’d be satisfied to convert 10 per cent of those into repeat customers.”

O’Flynn agrees. “It wasn’t all wrong, and we probably would do it again,” he says, adding that it might be more suited to its golf course.

“It has been very successful for the golf,” he observes, noting that they intend working on a membership offer over the coming month. This time around however, lessons have been learned.

“We will limit it to about 50,” he says.

However, while they might go with a daily deal again, which operator will they use? Since Groupon powered into the market, it has fragmented, and with so few barriers to entry – having a database of subscribers being a critical one – numerous other players are encroaching on the business through a more competitive pricing strategy.

“The space is wide open to be improved; it’s only in its infancy,” notes Whelan.

Indeed while Groupon and LivingSocial typically take a 50 per cent cut on each deal, others don’t. At Pigsback, its take varies by category, but is nearer to 30 per cent. “In certain instances it’s even lower,” says Dwyer.

Moreover, there are questions to be raised about the sustainability of the sector. One of the advantages for Whelan was that the deal enabled him to build up a database of 1,300 customers who have a clear appetite for his product. So in future, he could just target these with an email detailing special offers – and this time he won’t have to let the deals company keep 50 per cent of the revenue.

And consumer tastes can be fickle. As Briefett says, “our aim is to try to surprise and delight on a daily basis”. But how long can they keep coming up with such offers in a small market such as Ireland? During the summer, Michelin starred Malahide restaurant Bon Appetit was offering a €70 spend on food for just €35. It sold some 650 vouchers. More recently, Chinese restaurant Tian Yuan on Dublin’s Parnell Street offered subscribers a 54 per cent discount – and sold just 150 vouchers.

To survive, deal operators will really have to “surprise and delight” every day. In the end it will be consumers who decide whether or not the business has real legs.