- Australian group buying sites have an estimated collective value of $400 million, and together publish 4000 deals daily, with each deal emailed into thousands of Australian inboxes.1
- This segment of the e-commerce sector is experiencing rapid growth in Australia, estimated to be at 72% each quarter; and its collective worth grew from $73 million in the first quarter of 2011 to $123 million by June.2
In a market in which there is a new entrant almost every week, group buying sites must address the expectations of their consumers, as well as their advertisers, that is, the businesses choosing to offer discount deals via a group buying site. Among the issues faced by advertisers are choosing a group buying site, negotiating terms and conditions with the site operator, meeting consumer demand, and attracting one-off customers at the risk of alienating existing customers. At the same time, there are a growing number of media reports doubting the robustness of the group buying industry.
In a similar vein, many predict that not only will customers quickly cool towards the sector but also that advertisers' brands will be prejudiced by the bargain hunting customer audience targeted by group buying sites. Meanwhile, reports have surfaced that Nine Entertainment and Microsoft have put on hold the estimated $80 million sale of Cudo (their jointly owned group buying site and one of the largest players in the Australian market), indicating that "those with money tied up with the group buying sites still see value".3
What is group buying?
Group buying sites offer advertisers a guaranteed amount of profit (provided that the agreed amount of buyers make a purchase) and exposure to a sizeable and new audience. In essence, the business model of most group buying sites involves a discount being offered to consumers online by the group buying site on behalf of the advertiser. Group buying sites take a commission on the resulting sales of the products of the advertisers.
Buyers commit to purchasing the relevant products by providing their payment details (as they would in any other online transaction); however, the purchase is not finalised until a certain level of sales is achieved. That is, a certain number of buyers (which is usually agreed to by the group buying site and the advertiser), must commit to a purchase by providing their payment details (hence the name group buying). Once this target is reached, the purchases are finalised.
Reaching an audience
One of the strongest attractions that group buying sites have to advertisers is the customers they bring. The investments being made by, for example, Yahoo!7 in acquiring Spreets4 and a James Packer led consortium in acquiring a 40% share in Catch of the Day and Scoopon5, are to obtain access to potential customers - customers which they could offer advertisers in return for a commission.
The customer audience that group buying sites can offer advertisers is assisted by the fact that the group buying business model results in each buyer having a self interested motive to use what is still the most effective marketing tool of all - word of mouth. A buyer taking up the offer of, for example, a $39 seafood platter for two, wants their friends to take up the offer too.
Group buying sites, assisted by their customers, boast large mailing lists and significant numbers of Facebook fans, and Twitter followers. Also, most group buying sites offer advertisers targeted local audiences. For example, Spreets offers multiple Spreets Facebook pages: Spreets Sydney, Spreets Newcastle and Spreets Melbourne, amongst others.
Can your business meet the demand?
Once the deal has been finalised, the advertiser enters into agreements with customers. Like other consumer agreements, these agreements are subject to the Australian Consumer Law. There are numerous examples of advertisers who have been caught unawares and unprepared for the unexpected demand for their offered good or service after a promotion on a group buying site. The NSW Department of Fair Trading has indicated that most of the complaints relating to group buying it receives relate to the unfulfilled supply of goods and services.6
Even if your business can meet the demand, it may be unprofitable to do so. This may be the case if your business is labour and/or time intensive. For some businesses, it may even alienate their existing clientele. For example, a beauty spa advertiser offering 1 hour facials for $30 may generate so many bookings that it can no longer cater for its existing (and loyal) clients who pay more than $30 for a treatment.
While the primary target for consumer's ire over a failure to meet demand is likely to be the advertiser, the group buying site may, due its profile, be pursued.
In recognition of the difficulties, the Australian Interactive Media Association (AIMIA) and the Australian Direct Marketing Association (ADMA) jointly launched the Australian Group Buying Industry Code of Conduct in November 2011 (the Code).7
Signatories to the Code include Jumponit, Our Deal, Cudo, Spreets and Scoopon. The Code confirms the signatories' commitments to consumers with respect to, for example, misleading and deceptive conduct, privacy and spam emails. The Code also sets out a complaint mechanism, so that complaints against a group buying site are directed to and investigated by ADMA.
The business of group buying sites gives rise to a myriad of legal issues. These can have detrimental consequences for both the advertiser and the group buying sites themselves, particularly where the relevant actions cause the consumer to become disgruntled and reluctant to see any of the benefits offered by group buying sites.
Set out below are legal checklists for both advertisers and group buying sites. Consideration of these issues will minimise the likelihood of adverse legal ramifications for businesses involved in the group buying sector.
A checklist for group buying sites:
- Are you meeting the commitments in the Code? Even if you are not a signatory, the Code is likely to be seen as setting the standards that the sector as a whole is expected to meet. Have you reviewed your site to ensure compliance with these standards, some of which are listed below?
- Do you have a clear policy to deal with advertisers who fail to deliver? While the contract for the sale of the product is typically between your client (that is, the advertiser) and the customer, the Code not only places an obligation upon a group buying site to have a clear and unambiguous refund policy, but also specifies that this policy must include an example of what happens in each of the following situations:
- the advertiser goes into liquidation;
- the advertiser fails to provide the goods or services; and
- the goods or services supplied to the customer are not as advertised.
- Think about your brand. Your clients (the advertisers) and their products are what consumers will associate your group buying site with. Choose the advertisers (and their products) wisely.
- Are you indemnified against third party intellectual property (IP) claims? An advertiser's product which seems like an imitation of a branded product can be offered through your site to buyers at a cheap price; however, it also exposes you to the prospect of claims of intellectual property infringement, misleading and deceptive conduct and passing off. Any agreement between a group buying site and an advertiser should contain relevant indemnities
- What claims are being made by your advertisers? Despite any argument that a group buying site is an intermediary (or an agent) which means that the advertiser is primarily liable for any claims made, there exists a real risk that a group buying site will be held liable in respect of claims made in any promotional material relating to a deal. This is particularly the case where, for example, your group buying site employs copywriters to create promotional material and this material bears your site's name and logo.
- Do you have processes in place to ensure that the products you have agreed to sell are suitable for sale through a group buying site? For example, the Cosmetics Physicians Society of Australia was recently concerned that the sale of discounted Botox treatments on group buying sites may be in contravention of laws relating to the supply of therapeutic goods/services. The Code sets out a list of statutes which include prohibitions on the sale of certain categories of goods.
- Do you have a marketing strategy? Your business is selling your clients' products to your consumer base - how are you building and maintaining your consumer base?
- Be aware of your obligations under the Spam Act with respect to your communications with customers. These obligations are briefly set out in the Code.
- Keep your best advertisers coming back. Group buying sites compete in a highly saturated market and it is likely that many of your advertisers are also receiving daily deals from your competitors. How do you retain your best performing advertisers?
- Do you have training programs in place to ensure your staff are aware of areas of potential liability?
A checklist for advertisers:
- See how the group buying sector works. If you have not done so already, sign up to a few group buying sites and take note of the offers and the advertisers. Look at what customers are saying on social media websites like Facebook and Twitter.
- Do the maths, for the best and worse case scenarios - are both profitable? Neither scenario may be likely but keep in mind that, as a business offering goods and services, you have obligations under the Australian Consumer Law.
- Shop around. There are lesser known group buying sites which specialise in the sale of a particular category of products and services and offer advertisers a more targeted customer audience than others. (For example, there is a group buying site which exclusively sells restaurant deals.) As an advertiser using a specialised group buying site suited for your products, you would have the benefit of a more targeted - but possibly smaller - customer audience.
- You may be in a position to negotiate better terms with some sites which are more favourable to your business than the standard terms generally proposed.
- How are your competitors advertising? You may get a competitive edge using an advertising medium they have not yet used. Alternatively, your competitors might be avoiding group buying sites for good reason, for example, where unsuited for the relevant category of products.
- Is the product you want to offer suitable for sale through a group buying site? As mentioned above, the sale of Botox treatments using a group buying site may be in contravention of the law.
- Does the product you want to advertise through a group buying site infringe a third party's IP? Group buying sites may allow you to market a popular product to thousands of consumers in a very short space of time; however, if this product infringes another party's IP in the country where the group buying site's customers are located, that third party may bring court proceedings to stop the unauthorised use and claim damages or an account of profits.
- Do you have control over the promotional material the group buying site will publish to promote your good or service? These promotional materials are often created by the group buying site; however in the event of any misleading and deceptive conduct or passing off claims, it is likely that you will also be considered responsible for the content of this material.
- Consider the Code. It will give you an idea of the level of service to which the industry leaders are prepared to commit.
The assistance of Jessica Azzi, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated.
1 Nina Hendy, "Group buying sites miss the market", The Sydney Morning Herald, 7 October 2011: http://www.smh.com.au/business/media-and-marketing/group-buying-sites-miss-the-market-20111006-1lbkp.html.
3 Supratim Adhikari, "TECH DEALS: Cudo holds the line", Technology Spectator, 10 October 2011: http://technologyspectator.com.au/analysis/tech-deals/tech-deals-cudo-holds-line?utm_source=Technology+Spectator+List&utm_campaign=684fdbf39a-TECH_SPEC_DAILY&utm_medium=email.
4 James Chessell, "Yahoo!7 buys daily deal site Spreets for $40m", The Australian, 21 January 2011: http://www.theaustralian.com.au/media/yahoo7-buys-daily-deal-site-spreets-for-40m/story-e6frg996-1225991947195.
5 Ben Grubb, "Online jackpot: slicing up Packer's millions", The Sydney Morning Herald, 23 May 2011: http://www.smh.com.au/small-business/entrepreneur/online-jackpot-slicing-up-packers-millions-20110523-1f07x.html.
6 See for example: Alexandra Smith, "Going for a thong... but little to show as group buying site caught short", The Sydney Morning Herald, 3 October 2011: http://www.smh.com.au/lifestyle/shopping/going-for-a-thong--but-little-to-show-as-groupbuying-site-caught-short-20111002-1l3sg.html.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.