Harnessing the power of crowds

The idea has been around since the invention of capitalism: the more pieces you buy of a certain item, the lower the price you have to pay for each piece. As anyone who’s been to Divisoria — and ended up buying two dozen flashlights instead of three — knows, it’s called the wholesale rate. The seller gets to dispose of her merchandise quickly and still make a profit; the buyer acquires the merchandise for less than the original price.

In 2008 the website Groupon, short for “group coupon,” started offering deals based on the idea of the wholesale rate.  Registered users could avail of discounts of up to 90 percent at restaurants, shops, hotels, spas, boutiques and other merchants — without having to buy mass quantities of the listed products or services. Why would the merchant give them the wholesale rate if they’re only buying one or three pieces each? Because they’re a group, and collectively they’re buying a lot of pieces. It’s like a mass action, in which the action happens to be shopping.

In short, Groupon is harnessing the power of crowds. To do this you begin by mustering a crowd. Every day a deal is posted on groupon.ph — say, 50 percent off on T-shirts with a picture of my cat, Mat-Mat McCaw, on them. A minimum number of buyers is required for the deal to become available — say, 20. Once that number is reached, the 50 percent discount on Mat-Mat McCaw T-shirts goes live. The buyers are happy, the merchant is happy — unless the demand for T-shirts (Mat-Mat is extremely adorable) exceeds the merchant’s supply, which is why there has to be a cap on the number of “groupons”.

So you buy your T-shirt and pay for it online with your credit card or PayPal account, through Globe GCash, or with Groupon credits purchased over-the-counter at designated banks.  How are you going to get your hands on the T-shirt? One reason online shopping is not as big as it should be in our shopping-mad country is the cost of freight and delivery. For instance, if you buy a book from an online bookstore in the US, you either pay a freight charge that is higher than the cost of the book, or you wait a long, long, long time for it to arrive via regular mail, and “long” can mean “forever”, literally.

“The advantage of Groupon is that the deals are local, so when you buy something online you can claim it directly from the dealer,” explains Groupon Philippines’ chief marketing officer Richmond Escolar. “You cut out the waiting. There is a merchant you contact, so the trust factor is very high.”

“Groupon is amazing for the consumer, but it’s also a platform that’s really subverted — or inverted — the marketing industry,” declares Groupon Philippines CEO Patrick Cuartero. “If you’re a merchant you have to advertise your product and that’s expensive. You pay up front, but you don’t know what you’re going to get out of it. With Groupon you know exactly what you’re getting.

“We have a significant subscriber base, social media, and we can actually show you how many people are buying these deals from us. We can structure the deal to really work for your business,” says the 30-year-old Fil-American CEO.

(Digression: Patrick left Merrill Lynch in 2006 to follow his passion. Back in high school he had toured the US to give demonstrations of yo-yo skills; in 2005 he established YoYoNation the store and YoYoNation.com the website. “Under the fluorescent lights of corporate nightmare,” he took up the yo-yo again. You may have seen Patrick on MTV’s Silent Library, punishing the noisy by hitting them repeatedly with a yo-yo. Do not try that, it is painful. End of digression.)

As an example Patrick uses the restaurant we’re eating halo-halo in. “It’s lunchtime and seven tables are empty. Times four seats per table equals 28 covers per hour, and that’s inventory out the door because a restaurant’s inventory is the number of seats. We can help fill those seats. The reason merchants give us discounts is because they need something compelling enough for our subscribers to open their email, look at the subject line, click through to the site and make the purchase.”

“The great thing about it is that there’s no upfront cost to the merchant,” Richmond notes. “You only pay for the people that actually come to your door. If no one buys the deal — which never happens — there’s no cost to you, and you get all those impressions for free.”

How does Groupon make money then? “We make a commission on every person that comes to your door,” Patrick says. “You can think of us as a referral agency.”

“We now have 750,000 email subscribers in Manila, Cebu and Davao,” Richmond adds. “The Groupon model is about being local. You want to avail of deals in your own town, because you don’t want your savings to be negated by the travel time and gas. Our newsletters are relevant to your specific neighborhood.”

“If you think about it,” Patrick muses, “you’re going to go to a restaurant anyway and you need to eat anyway. Buying a groupon for a restaurant is like getting free money.”