Social Commerce 2-Sided Networks: The Effect on Local Businesses

Lately, there’s been so much news on social commerce platforms. From Google trying to buy Groupon, to Amazon purchasing a stake in LivingSocial, these social commerce sites have taken over the internet.

Though, I’m not complaining…as a consumer I learn about new things in town, get great deals from food and try new things like skydiving. This semester (Fall 2010) in our class Economics of Information, taught by Prof. Erik Brynjolfsson, a team of us (Esther Tan, Jason Costa, Mansoo Jimmy Park, Joy Koh, and myself) examined the effect on the local businesses in this 2-sided network.

[NOTE: this is also posted on the class website]

The landscape for collective buying platforms is growing tremendously. In this two-sided network, the service providers receive revenue on every deal, and the consumers receive deals on businesses, services, and restaurants in their local area, often 50% or greater.

Then what about small businesses? 

In our study, when local businesses try to advertise to their small community, they often go through local newspapers, spending thousands of dollars without clear metrics on their advertising returns. In contrast, these collective buying platforms offer numerous benefits to small businesses:

  • 90% new customers
  • Opportunity to up-sell
  • 20% return rate on customers
  • Up to 40% un-unused rate on deals
  • Customer relationship management (CRM) opportunities

For businesses with small marginal costs [fitness classes or memberships], even if a deal is 50% off, every deal is almost pure profit.  Even for businesses with high marginal costs [services or restaurants], this still creates exposure, as long as they do price to take a loss any each deal.

One of the biggest benefits to small businesses is cash flow. Once the deal is finished on the platform’s site, they immediately receive the cash. Essentially, they’re borrowing the cash until the buyers use the deal, which many do not use at all. Further, it is not uncommon for many of these small businesses to sell number of deals equal to their units sales of the previous year!

In conclusion, everyone wins in this 2-sided network. The platform and their business model, the consumers with their deals, and the small businesses with their “better than free” advertising, exposure, and clear customer segmentation. The only casualty we see in this situation, a familiar trend in this internet age, the local newspapers.

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