The Math and Psychology Behind Group Buying
Josh Kopelman, a partner at First Round Capital, recently wrote a post entitled Change is coming to online shopping in which he argued that disruption is finally poised to return to e-commerce after a decade of relative stagnation (Josh knows retail—he sold half.com to Ebay during web 1.0).
His thesis: Real time marketing and targeting introduced by the social web, mobility (luxury auction site Gilt Group just released an iPhone app) and group/game dynamics are among the forces rapidly changing the ways in which people buy.
One massive business opportunity that has popped up is group buying. Some people call this real time buying or group coupons. The sector is led by Groupon ($250M valuation!), and a ton of others have popped up serving regional markets, including Yipit and ScoopSt in NYC. If you aren’t familiar with these, check out their sites and sign up, there are some interesting deals (but too many spas and body waxings).
So why has group buying, as a phenomenon, accelerated so quickly? One reason is the ability for a ‘deal’ to go viral to people’s social graph—buyers are encouraged to share that they just took part in a ‘deal’. If I buy something and I tweet it, chances are a portion of you are at least going to click the link. But this is only part of the reason in my opinion…
Group buying also does an incredible job creating perceived scarcity. Scarcity of any resource (via competition, contention, limited supply) causes people to take action. In the case of group buying, people act for fear of ‘missing out’—even if they only had mild interest to participate based on the product or service itself. All of the group buying companies I have encountered play on people’s desire to feel included in the deal. Most even have an hourglass and a time counter that clicks down to zero (to the second!).
In order to encourage participation, companies use phrases like “deal will only happen if we get enough people, fast enough” (BuyWithMe’s tag phrase) next to the purchase button. This is powerful psychological signaling to the would-be buyers. The graphs below show standard and viral adoption, which happens because of these factors.
From a psychology perspective, I find it fascinating that group buying sites have made coupons “cool”. Coupons have historically been for ‘cheapskates’, and certainly weren’t something you wanted to brag to all your friends about. So why is it different now with group buying?
There is a certain safety in group coupon usage—by being associated with a demographic who is like-minded, people no longer feel cheap, and instead feel cool. They think: “look at all these other people who I like to interact with who are using the coupon!”
The rewards associated with group buying are not limited to goods or services. Companies like KickStarter, which helps freelancers raise money for a project, can rely on the same type of psychology and group participation in funding projects.
All these companies can benefit from the use of statistics to analyze how to further optimize adoption. The companies that understand how to push the psychology and math in their favor the most will probably be the dominant ones standing in the end of the group buying craze/bubble.