IQ News: Analysis – Good Buys

Online buying groups are giving savvy shoppers a whole new way to drive a better bargain.
Move over, online auctions. Aggregated-demand buying services, in which consumers pool their purchasing power to get a discount on a specific item, just might be the next big thing in e-commerce.
With online group-buying services, as the number of buyers for an item increases, the price of the item goes down. Many kinds of merchandise are available, from strollers to office furniture to computer hardware and software.
The most established group-buying sites, San Francisco-based Accompany and Seattle-based Mercata, have been around about a year and a half, and are doing brisk business. And the category will really heat up later this year when giants America Online and Yahoo! launch their own aggregated-buying services. These behemoths have the single most important factor for group-buying success: traffic.
Mercata, currently the Net’s most prominent group-buying destination site, launched in the fall of 1998 and has seen considerable growth since then. The company–known for its “Down is Good” advertising campaign, in which ecstatic Wall Street traders shout, “It’s down! It’s down!”–has utilized advertising more than any other site in this category.
“Our largest buying groups have had over 10,000 participants for a single purchase,” says Randy Nargi, vice president of marketing for Mercata.
Nargi won’t go so far as to call online group-buying services a trend, preferring to describe them as “a movement where consumers are empowered to influence prices.”
Mercata’s chief rival, Accompany, founded in October 1998, was also one of the first online group-buying sites. “When we launched, we would have 25 to 50 buyers for a given product,” says Salim Teja, Accompany’s vice president of corporate development.
“Now we have up to or more than 500 buyers consistently.”
Teja “absolutely” believes aggregated buying is a trend. “It has captured the attention of buyers,” he says. Group buying may one day be more popular than online auctions, in Teja’s opinion. “It takes advantage of the power of the Web, which is to connect people,” he says. “With group buying, it’s to your advantage to encourage friends to come to the site and buy. With an auction site, it isn’t, because they might outbid you.”
Accompany is an enabler of group buying. While it provides the service through its own Web site, its primary focus is supplying the necessary tools to other sites. It has partnered with sites such as, and
One of the newer entrants in the market is New York-based Zwirl. “When we started in November 1999, we were shouting for attention,” recalls CEO and founder Jessica Adelson. “Nowadays, people are calling and asking about our service.”
Zwirl differs from both Accompany and Mercata in that Zwirl customers specify what they want rather than choosing from a list of available products. Like Accompany, Zwirl is an enabler,
making it possible for other companies to provide group-buying services. “We’re not a destination site like Mercata,” says Adelson. “I don’t care if nobody visits our site.”
The company offers group-buying tools to niche sites that cater to enthusiasts of everything “from knitting to snowboarding,
parenting to physics,” says Adelson.
Meanwhile, the industry’s two 800-pound gorillas are set to launch their own group-buying services.
Jeff Mallett, president of Yahoo!, earlier this year was quoted in industry publications as saying that the Santa Clara, Calif., navigation hub’s group-buying service will launch by the end of 2000. Yahoo! representatives declined to comment for this article.
Yahoo!’s entry would be significant, given that it is a perennial front-runner in Web traffic. In January, for instance, Internet measurement firm Media Metrix of New York rated it as the second most popular online destination.
AOL, the most heavily trafficked site in Media Metrix’s ratings, will launch its group-buying service in March, according to Patrick Gates, the Dulles, Va. firm’s vice president of electronic commerce.
“We bring 21 million members to this experiment,” says Gates. “If you can get a small percentage of them to try it, this can really set the direction for this particular buying behavior.”
But Gates is not making any grand predictions about the future popularity of group buying at this early stage in the game. “From a consumer standpoint, I’m cautiously optimistic,” he says.
Gates expects the adoption rate among the general public to be “a little conservative” at first because group buying “is a fairly new phenomenon.” He observes, “For early adopters and technically minded people, it’s fun. But for less sophisticated consumers, it’s a radical behavior change.”
Gates believes that group buying will work only for certain types of consumers. Buyers who know what they want and are in a hurry to get it are unlikely to use a group-buying service, he maintains. “The directed shopper who doesn’t have a lot of time will go to a search mechanism or price-comparison service,” says Gates.
But for people willing and able to wait a few days, a group-buying service associated with one of the largest companies in the Internet industry could be useful.
“Being the main street is an advantage” for AOL, enabling it to get volume discounts, Gates points out. “We have a great group of partners who sell the best brands.”
The current group-buying services have mixed reactions to the prospect of two huge new members joining their until-now small club.
“I think it’s a positive,” says Zwirl’s Adelson of AOL and Yahoo!’s entry into the online group-buying field. “It endorses what we already know: It’s going to be as big as auctions.”
Adelson does not feel intimidated. “We’re not competing with them,” she says. “They’re horizontal. They’re portal sites. We’re vertical, supplying the tools to other Web sites. It’s a big marketplace. There’s room for everyone.”
Accompany’s Teja doesn’t see it that way. “The area will not accommodate many players. The whole space will be controlled by two or three dominant players,” he says. “It’s critical mass. Whoever can create that critical mass can create the most value for buyers and suppliers.”
Because group buying is all about volume, with the largest buying groups commanding the lowest prices, “this is not the kind of service you that can spread and flourish over several places,” Teja maintains.
But while Teja believes the market has room for only two or three players, he also professes not to feel threatened by AOL and Yahoo!’s plans to offer group-buying services. “They are potential partners of ours,” he says. “Any of these major communities could be a potential partner.”
Mercata is also open to the possibility of a partnership with Yahoo! or AOL. “We would welcome and look forward to Yahoo!, AOL or other respected portals licensing our business methods and technologies to build a group-buying platform for their customers,” says Nargi.
For its part, AOL will not discuss possible partnerships with Accompany, Mercata or any other buying group. “It is not the company’s policy to comment on rumor and speculation,” an AOL spokeswoman says.
But Carrie Johnson, an analyst for Forrester Research in Cambridge, Mass., believes some consolidation is in the offing. “Yahoo! and AOL will probably partner with one or the other” of the two companies, she says. Like Teja, Johnson also believes the online group-buying scene will probably end up in the hands of just two or three companies.
“The fight will be for Accompany and Mercata to quickly snatch up relationships with the portals,” Johnson says. “The absolute advantage is having a network because you have greater volume, and prices go down significantly.”
Volume will make the advantages of this business model more powerful, she adds. “Right now the savings aren’t that extraordinary. If 20 people buy something you might save 5 percent. But if 2,000 people buy, the savings become significant,” says Johnson.
Group buying will become popular in the next two years because young people and the general public will begin to participate, Johnson predicts.
“Up until now, the Web was skewed toward upper-income, tech-savvy people. But now the mainstream is moving in. These ‘Wal-Mart shoppers’ will go out of their way for a perceived good deal,” she says.
Consumers in the 16-22 age group “are price-sensitive and big fans of online buying. And 45 percent of them have visited demand-driven sites such as Accompany and Mercata,” according to Johnson. Between John Q. Public and the Y Generation, group buying will become established as a significant part of the online buying market, Johnson believes.
The advantages are obvious–and unique to the Web, Johnson points out. “Ordinarily, you can’t walk into a store with eight friends and demand that the price go down. The closest thing to it is a co-op, but with online services, you don’t have to join or stick with it. It’s a start-up co-op.” n
Buying power for the masses
Getting a bargain online is strictly a numbers game. Like-minded buyers pool their purchasing power, and the price drops as the group gets larger.
Here’s how it works. Let’s say Mary Consumer has a yen for a Palm V. She discovers her object of desire is selling at Accompany for $290. Since the Palm V lists for $399, she joins the 19 people who have already agreed to buy it.
The group now must wait a few days. During the waiting period, which varies from site to site, two more people join the group, and the price drops to $284.95. Mary is pleased (though if 32 more buyers had joined, the price would have gone down to $278.95).
The buying cycle comes to an end, and Accompany sends the order to the supplier, which ships the items to the customers. (In addition to distributing the goods, the supplier sets a limit on the number of items offered.) The company pays for ground shipping, and Mary and her cohorts get their Palms in a few days.
“Group buying will become really popular with the online audience over the next two years,” predicts Carrie Johnson, an analyst with Forrester Research in Cambridge, Mass. “We’re in a period of experimentation now.”
Online sales in general totaled an estimated $36 billion in 1999 and should double this year, according to trade association of Silver Spring, Md.–J

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