Is social buying in Vietnam a sure bet?
It shouldn’t come as a surprise that what we now know as social buying originated in the land where Mao once declared: “With many people, strength is great.” If urban business legends are to be believed, tuangou or team buying started with a housewife trying to bargain her way to a discount. When the shop owner wouldn’t budge, she returned with her closest friends and “mob bought” her way to a better deal.
Fast forward to the mid-2000s when tuangou went digital. Then, groups of strangers interacting on bulletin board sites (BBS) were able to organize themselves into virtual mobs, sometimes relying on a group leader to negotiate for big ticket items - cars, furniture and electronics - or meeting up in person to pressure vendors into the best deals. Internet videos of the early tuangou days show massive groups screaming, “No, we don’t want it!” to a visually cowering merchant who slowly relents to a chorus of cheers. While retailers initially resisted the trend, it wasn’t long before they realized the potential of social buying. Soon, BBS and other startups were stepping up to take on the role of group leader, organizing deals themselves on behalf of users. Many estimate there are now more than 2,000 social buying sites in China alone, with companies like Groupon and LivingSocial leading the Western market.
At its core, social buying is built on the same premise as tuangou: The merchant agrees to sell a product for a significantly reduced price as long as a minimum number of customers agrees to buy it. The customers win in that they get a price they wouldn’t have been able to negotiate on their own and the vendors win in that they reach a whole new group of potential repeat customers. At least that’s the way it’s supposed to work. The real story behind social buying, however, often includes just as many losers as winners.
“This type of business has a low barrier to entry. You throw up a website and start talking to merchants. They don’t lose anything. You can pitch to get upfront money. For instance, if I project to sell 1,000 vouchers, I can give [the merchant] half [the money] upfront. That’s the whole point of the Groupon model, to collect cash first and distribute it later. It’s a negative working capital model. So you have enormous amounts of cash, do marketing, sell more vouchers. It’s an endless cycle,” says James Vuong, Vice President, Investment & Technology, at IDG Ventures Vietnam, which invests in Vietnamese e-commerce sites like NhomMua, Hot Deal, CungMua and MuaChung (all of which are in Vietnamese only).
Losing Money
The process usually starts off with a company representative contacting a merchant who agrees to provide a discount (usually 30-50 percent or more) to customers who pre-buy vouchers which can be exchanged for a product or service. The Vietnamese model lags behind most other countries in that vouchers cannot be printed, but must be hand delivered, adding three to five days of wait time. From what the customer pays, the social buying site will take a commission (sometimes negotiable with the merchant for anything between 20-50 percent), leaving the business making at times as little as 25 percent or less of retail value.
That was the case with Nu Cuoi Duyen Dental Clinic, a cheery, modern facility in Phu Nhuan. “Within a few weeks, we sold more than 700 vouchers through Hot Deal and more than 1,000 vouchers through NhomMua,” says owner Duy An Vo, of the VND50,000 teeth cleaning, marked down from the usual VND200,000. “We’re not making any money from it, and the vouchers barely pay for the materials, but we’re seeing lots of new customers who we hope to turn into regular customers and for them to tell their friends. Referral marketing is much more persuasive than print marketing. Our four dentists have had to work straight through lunch and we’re staying until 9 or 10 in the evening to take care of all the customers, but we’re doing this to get our name out.” The clinic, open for little over a year, is trying out each social buying site once, in addition to more traditional forms of marketing.
“You’re supposed to lose money at the beginning,” confirms James. “You’ll lose money on the first voucher but you’re going to give [the customers] such a good experience that they’re going to come back. The lifetime value makes up for the loss. Next time, they’ll bring their friends, and that lowers the barrier of trying out a new venue. That’s how it’s supposed to work. The key is to be good at accounting to make sure that on a per voucher basis, you’re not losing [too much] money.”
Problems arise when many of the small, non-business savvy mom-and-pop venues that choose the e-commerce route don’t fully think things through. A sudden massive influx of new customers may overwhelm small businesses, overtaxing staff and resources. The web is rife with cautionary stories like the London baker who ended up having to make 102,000 cupcakes to fill 8,500 orders at 75 percent off, leading to a loss of USD20,000. Or the Portland cafe who took in only USD3 for every USD13 worth of products, leaving them USD8,000 in the hole.
Banh Xeo Ba Hai, a Vietnamese eatery which looked spacious online, but in reality only had 32 seats, could barely keep up with the more than 1,000 users who purchased a voucher for a combo set which included a banh xeo crepe, shrimp rolls and a che dessert for VND54,000. “We recently opened in this new location, so we wanted to get people in to taste our food,” explains Liem while his mother pours huge crepes stuffed with shrimp, squid and papaya in the background. “I didn’t expect this many people would buy vouchers.”
The lure for many small businesses is in avoiding the initial outlay of any marketing costs. “We’re doing it because we’re a small business and can’t afford TV or print ads,” says Mai Hoa, owner of Bonjour Resto, a quaint cafe that serves up unusual fare like venison and ostrich. “The social buying people do all the work. They come in and take photos and do all the marketing. We only need to be concerned about taking really good care of the customers.”
Therein lies another dilemma - guaranteeing a good user experience, turning the bargain hunter into a repeat customer. “Sometimes the merchant will reduce the price, but they’ll also reduce the quality. When people come in and use a voucher, employees are going to look at you and judge you. So two things combined - a lower quality product with a bad attitude and overcapacity, places packed, long lines. It all contributes to a horrible experience. It’s equivalent to losing money. You get people to come, then slap them in the face, and they don’t come back. You don’t achieve a lifetime value,” says James.
“I recommend going with [an in-house] promotion instead of buying a voucher so that the servers don’t look down on you,” writes Luccie Nguyen, blogger and social media specialist, on her Vietnamese-language food site, meoac.info. “As soon as staff hear you’re using a voucher, they treat you differently.” On the issue of quantity and quality, Thu, an accountant in Phu Nhuan, is sure restaurants treat voucher users differently. “I think their portions when they sell on e-commerce sites are smaller than their normal portions.”
Hang, a housewife from Binh Thanh talks of her experience going to an all-you-can-eat seafood buffet. “We got there and each of us was given a crab. But when we tried to get more, they said they were out. But I could obviously see they had more. It turned me off to the whole thing and needless to say, I’ll never go back to that restaurant again.”
Dining With Farmers
Another issue to consider for both e-commerce sites as well as merchants themselves is attracting the right kind of customer. Regarding social buying sites, James says: “If you’re not careful, you can create a situation that is not sustainable. Consumers are often not loyal to the group-buying brand. The customers may be loyal to the deals or the venues without caring which site actually gives you the deal. It’s different if you consistently have positive experiences like with Amazon. But if a site sells discount deals, a consumer may come on to this site or go to another one, even if he’s never bought from it before. It’s similar for businesses. Every time you do a deal, you’ll lose money or sacrifice quality or product. But when you lose money, you’re hoping that person will come back. It’s a customer acquisition cost. But if you have to spend money to get me every single time, that’s not a sustainable business model. There are people who hunt for discounts only, so businesses will have a hard time selling to them [later] at full price. Or you may attract the wrong segment, like high-end places that have kids and farmers coming in which dilutes the brand.”
Similarly, Luccie notes that if her favorite restaurant is running a deal, she’ll typically wait until it’s over to revisit. “I don’t want to be in a fancy restaurant and spend VND1,000,000 per person and be seated next to someone who couldn’t normally afford to eat there. I think these deals are good for bistro-level restaurants and below, but not for the more upscale restaurants.”
The future of social buying sites worldwide as well as in Vietnam is uncertain. US stock prices for Groupon are trading at roughly one third of the peak they achieved in late 2011 when they became the second-biggest tech iPO in history behind Google. Amazon-backed LivingSocial is also losing money, posting an estimated USD82 million net loss for the fourth quarter of 2013. “We’re trying to tell them that it’s not a sustainable model,” says James of the group buying sites his company has invested in, “but they don’t believe us.”
He notes that the trend in many markets is moving from social buying to e-commerce where the sites actually sell products themselves. “When moving from group buying to products, smaller clones can sell inferior products. They buy on the cheap, put [the products] in warehouses and sell it themselves. But they’re getting merchants and users from each other instead of creating new users and merchants.”
In a culture where everyone is out to get the best deal, the future of social buying is anything but a sure bet.
Images by Ngoc Tran