Group buying market poised to soar

Start-ups providing group buying websites are beginning to take on internet auction companies in offering discount products to consumers.

But big internet players such as America Online (AOL) and Yahoo are also starting to eye the fledgling market as a means of attracting more customers to their websites, which could spell trouble for existing players.

To engage in group buying, website members decide what price they are prepared to pay for a particular product, and negotiate online as a group directly with the supplier until they reach agreement.

Sites such as Letsbuyit.com in the UK and Mercata.com and MobShop.com in the US offer a wide range of products, including home electronics, computer equipment, home and garden items, fitness and baby gear. MobShop has even offered cars for sale to test the water in that area.

A risky business
Seema Williams, an analyst at Forrester Research, said: "Group buying is more useful for higher priced products and it makes sense for Palm Pilots and DVD players. It is a little bit of a risky way to buy products, but if you are not time sensitive and can wait it's worth it."

But Andrew Bartels, an analyst with Giga Information, believes that the appeal of such websites also lies in their community aspects. "As well as the lower price, part of the attraction is the social dimension in the sense that friends can get together to push this pool over the critical mass and all get five per cent off [the price] as a result," he said.

David Cooperstein, another Forrester Research analyst, also claims that group buying makes consumers feel empowered and in control of what they spend, even if they end up forking out slightly more than they intended.

MobShop, Mercata and ActBig aggregate or collect users from across their network of interconnected websites to form pools of customers that are prepared to take part in the group buys. Letsbuyit.com pulls in buyers from its websites located in 14 European countries. Members are now signing up to the UK site at the rate of 5000 a day.

The suppliers make their money by charging a commission of between two and five per cent per transaction and source products from suppliers that are prepared to negotiate on price.

But group buying is not for those wanting instant gratification. The 'buy-cycle' or 'co-buy' - the terminology differs from site to site - does not take place immediately, with some taking several weeks to complete and deliver goods to customers.

Each buy-cycle remains open for a limited period - in letsbuyit.com's case, for example, two weeks. Once members participate, however, they are committed to buying their chosen goods, so they need to be sure they really want them.

But US online giants such as AOL and Yahoo are now starting to get in on the act. An AOL spokesperson confirmed that the company's shopping unit "would begin to test group buying", but declined to elaborate on any immediate plans.

Yahoo is also believed to be planning a group buying service for its members, although a spokesperson was guarded about the company's intentions. "While Yahoo is always looking at new business opportunities, we can't comment on any specific products before they are launched."

Testing the market
The big portal suppliers see group buying as a way of attracting more consumers to their sites. They are keen to test the market as it emerges, rather than lose out to start-ups as they did with the online auction sector now dominated by eBay.

Giga Information's Bartels said: "Both AOL and Yahoo are in the game of getting people to come and use their sites so they must create incentives or reasons for someone to go there. One of the reasons would be to participate in group buying."

"Although both do support auctions, it remains true that eBay still has the largest participating audience in this and they don't want to get so far behind this time," he added.

But the big boys' entry into this arena could spell trouble for existing group buying sites as potential members sign up to rivals that already have the critical mass needed to make this form of purchase a success.

As a result, Bartels predicts that smaller sites may need to enter into a "contract with the Devil" by licensing their patented technology to portal vendors rather than compete with them head on.

Take your partners
On the positive side, Forrester's Williams claims that AOL and Yahoo's entry into the market could serve to legitimise it and prove beneficial to smaller players if they partner with them.

"Dotcoms need to establish their own brand. That takes a huge amount of money and it's better to let other people do that for them. It's a more efficient way for them to get into the game and a way for the company to build up an infrastructure and to gain traction in the market," she said.

MobShop currently partners with other sites, but said that it expects licensing to be its next step. Mercata declined to comment, however, because it is on the verge of going public and is in its so-called quiet period.

Conversely, Letsbuyit.com plans to go it alone by setting up franchised sites in other countries, including the US. According to John Palmer, the company's joint founder, it started a TV advertising and marketing campaign in early February in an attempt to build critical mass. "It's another channel of distribution for [suppliers]. We're not cannibalising the market - we're building it," he claimed.

But while a Forrester Research study reveals that 40 per cent of group buying site users in the US are aged between 16 and 22 years, Palmer believes that the majority of Letsbuyit.com consumers are professionals aged between 25 and 39 years, with access to a computer at home.