Page 322 - Electronic Commerce

Social Networking, Mobile Commerce, and Online Auctions

sites were successful in developing a large enough following to interest merchants, so they
have all closed.
Many people think of Priceline.com as a seller-bid auction site. Priceline.com allows
site visitors to state a price they are willing to pay for airline tickets, car rentals, hotel
rooms, and a few other services. If the price is sufficiently high, the transaction is
completed. However, Priceline.com completes many of its transactions from an inventory
that it has purchased from airlines, car rental agencies, and hotels.

Group Shopping and Coupon Sites 297
Another type of business made possible by the Internet is the group purchasing site,or
group shopping site. On these sites, the seller posts an item with a tentative price. As
individual buyers enter bids on the item (these bids are agreements to buy one unit of
that item, but no price is specified), the site operators negotiate with the seller to obtain a
lower price. The posted price will decrease as the number of bids increases, but only if the
number of bids increases. Thus, a group shopping site builds up the number of buyers
sufficiently to encourage the seller to offer a quantity discount. The effect is similar to the
outcome achieved by a reverse auction.
The types of products that work well for group shopping sites are branded products
with well-established reputations, characteristics that help buyers to feel confident that
they are getting a good bargain and are not just getting a lower price for a low-quality
product. Ideal products also have a high value-to-size ratio and are not perishable.
Two companies, Mercata and LetsBuyIt.com, operated major group shopping sites
for several years; however, both closed their doors after failing to find consistent sources
of products that sold well on their sites. They found that few sellers of products that are
well suited to group shopping efforts—such as computers, consumer electronics, and
small appliances—were willing to work with them. Thesesellersdidnot seeany
compelling advantage in offering reduced prices on their merchandise to Web sites that
were probably cannibalizing sales in their existing marketing channels. They also
worried about offending the regular distributors of their products by selling through
group shopping sites.
In 2008, Andrew Mason and Eric Lefkofsky decided to give the group shopping business
another try. Starting in Chicago, they launched a site called Groupon (a shortening of
“group coupon”). The site offered one coupon offer (called a “groupon”)per dayin the
city. A groupon requires a certain number of people to sign up for it or it does not become
available to anyone. For example, a $50 dinner coupon redeemable at a specific restaurant
might be sold for $30. The consumer gets a $50 dinner for $30. Groupon would keep
approximately half the money paid by the consumer for the groupon ($15) and the
remainder would go to the restaurant. Thus, the restaurant gets $15 for its $50 dinner,
but it has a chance to impress a new customer and gain that customer’sreturnbusiness.
Further, the restaurant makes no upfront cash outlay, as it would if it were purchasing
advertising.
Groupon promotes its business using social networking sites such as Facebook and
Twitter to make contacts with consumers and to spread the word about the groupon deal
for the day. Groupon’s current customer base is primarily female, so the bulk of its

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