CUHK Business School Research Reveals the Science of Online Group Buying between East and West

HONG KONG,
CHINA -�Media OutReach - 28 January
2019 - Savvy internet shoppers should be
familiar with Groupon, an American e-commerce marketplace founded in 2008 that
offers group-buying deals (or social coupons), which are substantially lower
than market prices. However, there is one condition in getting these lucrative
deals — there must be a certain number of people to purchase the coupon before
one can redeem the deal. To reach the so-called ‘tipping point’, one would
think that buyers who are interested should try to spread the deal to as many
people as possible. However, is it really the case?

 

“Surprisingly, we found that people were not
that motivated to refer Groupon deals to other consumers, even when the deal
was not yet tipped,” explains Prof. Mandy Hu,
Assistant Professor of Department of Marketing at The Chinese University of
Hong Kong (CUHK) Business School.

 

“We’d expect that if a customer notices the
deal is not yet tipped when he purchases it, he is more likely to refer it to
others than when the deal is already tipped. However, that was not the case as
in our study,” she adds.

 

Her study titled “The ‘tipping
point’ feature of social coupons: An empirical investigation”
was conducted in collaboration with Prof. Russel S. Winer, William H. Joyce
Professor of Marketing of the Stern School of Business, New York University. It
is the first empirical study using individual level online browsing data to
investigate consumer behaviour in a group buying website.

 

The Business
Model of Groupon

Previous studies have identified the business model of Groupon as a
combination of two features: daily deals and group-buying deals. The early
Groupon website contained three crucial pieces of information to drive sales
growth: first, the ‘tipping point’ — the number of buyers needed to make the
merchant honour the discount; second, prior purchase — the number of people who
have purchased the deal before; and third, referral links which allow users to
share the deal with others.

 

The use of ‘tipping point’ and the information of deal purchase status
form a kind of assurance contract — a mechanism proposed by former game theory
studies in which people voluntarily contribute specific amount of money or
private good to a public good, and the decision to provide the public good is
made if and only if contributions are sufficient to reach a minimum amount.
Otherwise, the contributions are refunded.

 

“An assurance contract also prompts customers to act as sales
agents of the product, as they want to redeem the deals that they’re interested
in,” says Prof. Hu.

 

After the company went public in 2011 and a website revamp in 2013,
Groupon phased out the information about the tipping point, a feature that once
people thought to have played a prominent role in motivating consumer
behaviour. The exact prior purchase number was also replaced by an
approximation.

 

“These changes prompt one to wonder whether those strategies were
just marketing gimmicks and whether, in particular, the ‘tipping point’
strategy can significantly affect consumer behaviour,” Prof. Hu says.

 

The Study and Results

Setting out
to find the answer, the researchers utilised a large proprietary dataset
supplied by a third-party online marketing research firm consisting of the
complete clickstream within the browsing sessions of people who used the
Groupon website between January and March 2011 in the U.S. The team used social
computing techniques to extract the detailed information on the retrieved web
pages based on the Groupon URLs to observe individual customer behaviour.

 

The
researchers constructed three datasets based on the data: behaviour, deal
characteristics and demographic. The overall data is 28.2GB in size, containing
156,425,702 records. There were 186,756 unique individuals who have visited the
Groupon website at least once during the sample period. However, the majority
of the people did not make any purchase.

 

Surprisingly,
when studying the referral behaviour in relation to the ‘tipping point’, the
researchers found that the number of referrals for Groupon deals was not high
at all: There were only 872 referrals out of the total 114,459 deal views (0.76
percent). And among the 10,989 purchases, there were only 207 referrals (1.88
percent).

 

In
addition, the team found that among the 114,549 deals viewed by customers, only
about two percent of the deal views were referred by personal recommendations
through emails, Facebook or Twitter while almost half of them (49.7 percent)
came from a daily e-newsletter sent by Groupon to its subscribers.

 

“These
results indicate that the ‘tipping point’ status does not lead consumers to
refer the deals to others,” says Prof. Hu, adding that there could be two
possible explanations.

 

“Given
the customers’ knowledge that most Groupon deals will be fulfilled, they do not
worry about the ‘tipping point’. Also, they may worry about referring a bad
deal to their friends since making a referral suggests a vouch for the deal’s
quality,” Prof. Hu explains.

 

The study
also reveals that some deals are more likely to be referred more than others,
such as featured deals with limited quantities and deals that came from
personal recommendations via emails and Twitter since “personal
recommendations seem more trustworthy than recommendations from Groupon e-newsletters,”
she says.

 

“More
experienced Groupon users are more likely to refer a deal to others as they are
more confident about their judgement of the quality of the deal.”

 

So, the ‘tipping
point’ information may not affect referrals; however, it does affect the
likelihood to make a purchase and the time leading to a purchase.

 

Through
examining the purchase probabilities during each hour before and after the ‘tipping
point’, the researchers found that the average purchase probability steadily
increased until it reached the peak, which was about two hours after the
tipping point. After that, the purchase probability decreased but still
maintained at a higher level than before the ‘tipping point’.

 

“After
the ‘tipping point’, people generally spend less time from the first view until
they purchase the deal. Hence, the ‘tipping point’ information helps to speed
up the purchase process,” Prof. Hu says. “Although it doesn’t change
consumers’ referral behaviour, access to information about the ‘tipping point’
still encourages purchasing and decreases consumers’ consideration time.”

 

Contagious Purchase Behaviour:
Conformity and Social Learning

Previous
studies have stated two mechanisms that can explain the contagious purchase
behaviour: conformity and social learning. Conformity refers to people who
behave similarly to their peers if a large number of the peers are acting the
same way. For social learning, a person may decide to make a purchase if he or
she believes the action will improve his or her current condition by learning
the experiences from prior buyers.

 

In
conformity, the purchase depends solely on the popularity of the deal, whereas
social learning relies on how good or desirable the deal proves to be.

 

In their
study, the researchers found that conformity, rather than social learning,
played a more dominant role in driving contagious purchases.

 

“We
found that the majority of sales occurred on the first half of the day when the
deals were shown, which means people would check the social coupon websites
immediately and make quick purchase decisions at the start of their working
day. If social learning had played an important role, the sales should have
occurred later on to allow the information to accumulate,” Prof. Hu
explains, adding that the majority of U.S. consumers, including new and
experienced subscribers, make their purchase decisions within 30 minutes of the
first view.

 

Fall of Groupon and Rise of Pinduoduo

In recent
years, Groupon has seemed to lose its appeal to customers with tumbling revenues.
The company reported a 7 percent year-on-year decline in revenues on August 3
after reporting a similar decline in the first quarter of this year.

 

While
things are not looking good for Groupon in the U.S., the Chinese e-commerce
company Pinduoduo
went public in July this year, raising US$1.6 billion through an IPO in the
U.S.

 

Prof. Hu
believes there are a number of reasons for the three-year-old Chinese company
to “emerge quickly as the third largest e-commerce website in China”.

 

“First,
Pinduoduo fully utilises the largest social network in China by partnering with
WeChat [owned by Tencent], which makes referrals much easier. Second, its product
selection is different from that of Groupon with cheaper products. The average
price of their products is also much lower than that in [Alibaba’s] Taobao and
JD.com [the two fastest
growing retail brands in China]. And low price seems to appeal to a
fairly large group of customers in China,” Prof. Hu comments.

 

While her
study has proven that social coupons under Groupon’s model couldn’t lead to
more referrals, it seems to be working exceptionally well in Pinduoduo’s case.
Why?

 

She
explains that in Groupon’s case, it is the platform (i.e., Groupon) that
determines the group-buying opportunity for the customers. Groupon negotiates
with retailers who decide whether they want to work with Groupon or not and
under what terms. From the consumer’s perspective, they either take the offer
or not. So they are not motivated to refer the coupon to their friends.

 

“However,
Pinduoduo allows its consumers to decide which product they want to form a
group to get the discount. This gives them the sense of control and
responsibility. The ‘leader’ who initiates a group is motivated to get his
friends to purchase the same product together. And next time, when he is asked
by his friends to purchase their deals, he can’t say no easily. This effect of
social network creates the real ‘social’ coupon, which didn’t happen in the
Groupon model.”

 

“A
good social coupon model is not just forming a group of people to enjoy
quantity discounts. It is about motivating the customers to voluntarily form a
group to enjoy quantity discounts. In Pinduoduo’s case, everyone acts
voluntarily as a ‘salesperson’ of the product to their friends or
acquaintances. That is why I consider Pinduoduo a successful model creating
real ‘social’ coupons.”

 

Lastly,
culture also plays an important role in Pinduoduo’s success, the professor
notes.

“China
has a culture of collectivism and conformism, which makes Chinese people
willing to purchase the same products as their friends,” she says.

 

Reference:

Hu, Mantian
Mandy, Russell S Winer. 2016. The “Tipping
Point” Feature of Social Coupons: An Empirical Investigation. International Journal of Research in
Marketing.

 

This
article was first published in the China Business Knowledge (CBK) website by
CUHK Business School: https://bit.ly/2Dglu6K.

 

About CUHK Business School

CUHK
Business School comprises two schools — Accountancy and Hotel and Tourism Management — and four
departments — Decision Sciences and
Managerial Economics, Finance,
Management and Marketing. Established in Hong Kong in 1963, it is the first
business school to offer BBA, MBA and Executive MBA programmes in the region.
Today, the School offers 8 undergraduate programmes and 20 graduate programmes including MBA, EMBA,
Master, MSc, MPhil and Ph.D.

 

In the Financial
Times Global MBA Ranking 2019, CUHK MBA is ranked 57^th. In FT‘s 2018 EMBA ranking, CUHK EMBA is ranked 29^th in the world. CUHK Business School has the largest number
of business alumni (35,000+)
among universities/business schools in Hong Kong
— many of whom are key business leaders. The School currently has about 4,400
undergraduate and postgraduate students and Professor Kalok Chan is the Dean of
CUHK Business School.

 

More information is available at www.bschool.cuhk.edu.hk or by
connecting with CUHK Business School on
Facebook: www.facebook.com/cuhkbschool
and LinkedIn: www.linkedin.com/school/3923680/.