Prashant Mahesh, The Economic Times

Mumbai, August 12, 2011

Be it a holiday package, dining at a star restaurant or getting a hair cut at a fancy salon, everyone wants a better deal (read huge discounts) these days. This has led to a mushrooming of internet sites that offers discounts on everything under the sun. There are 20-30 websites like snapdeal, taggle, sosasta, mydala, and so on, offering such deals to customers. "Consumers want to try new products and at the same time save money," says Anisha Singh, founder and CEO, mydala.com.

The way it works

Group-buying sites offer heavy discounts on a range of products and services that are in demand. This is how the economics works: Any organisation broadly has two kinds of costs - fixed and variable. In the case of a restaurant, for example, the fixed cost includes expenses on air conditioning and maintenance, salaries paid to staff, etc. The variable cost is that of food. Now, a new restaurant needs to popularise itself to attract new customers. It may have a 100-seat capacity, but there may be only 50-60 people, on an average, seated at the restaurant. As a marketing exercise to attract more customers, the restaurant gives promotional offers through websites.

"Generally, a discount is given in such a way that the variable cost is covered, which, in the case of a restaurant, is food," says John Kuruvilla, founder and CEO, taggle.com. So if a meal at the restaurant costs 300, it is offered at a discounted rate of 150 to attract customers. This 150 covers the food cost.

This creates a win-win situation for both the customer and the restaurant. A lower price attracts customers to the restaurant to try the service out, which they may otherwise not do. At the same time, it also gives business to the restaurant. The website, in turn, gets a commission for every customer who buys the deal. A customer who wants to buy a deal from a website is given a voucher after the payment is made. So when you buy a service for, say, 500, some websites insist that you pay the entire amount upfront. Some others may allow you to pay 100 for the voucher and pay the balance to the vendor when the service is provided.

The typical group-buying site goes live when a minimum number of customers buy the deal. Generally, websites give a commitment to vendors to get a minimum number of customers. For example, for a dance class deal, the merchant may insist on at least five customers. Once the deal is put up and five customers buy it, the deal goes live (it is on the website). However, some websites do not go by this minimum commitment. Once the deals are uploaded, any number of customers can buy them.

What's on offer?

Almost all these sites offer deals on restaurants, salons and spas, dental check-ups, car cleaning, pest-control services and so on. Among the products they offer are electronic items and gadgets. Discounts could vary depending on the brand and category. In some cases, the discounts may be as high as 80-90%. As these sites pick up, new and exciting services get added.

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Taggle.com, for example, offered a helicopter ride in Bangalore for 1,498, which was a terrific success. Mydala.com offered a yacht sailing deal in Mumbai. A point to note is that deals are open for a limited period of time and it could vary from website to website. Many a time, there may be a catch that these deals need to be redeemed at certain hours only. For example a salon may give a discount offer on weekdays when there is less rush, or they may ask you to take a prior appointment before availing the services. Despite the tempting offers, there are concerns over quality and security, which make some consumers sceptical about buying from these websites.

Addressing concerns

The biggest concern consumers have is about the quality of the services and products offered. "Many a times, discounts are offered because the product is likely to be discontinued or lose its shelf life," says Devangshu Dutta, CEO, Third Eyesight.

So, typically, a smart phone has a shelf life of about 15 months. However, it can still be used for 3-4 years. So companies may start offering massive discounts after 15 months to push sales. Then, there are people who may complain about the quality of service at a salon or a restaurant.

Websites claim they try their very best to address such issues.

"There is a robust quality assurance process, which is performed by our internal audit teams for every deal that is signed up," says Kunal Bahl, founder and CEO, Snapdeal. The process of enrolling merchants is rigorous and long drawn.

Any compliant or adverse remark against the merchant on review websites (such as mouthshut.com) is taken seriously. Many a time, a member of the website's sales team experiences the service himself/herself to be doubly sure about the quality. Some websites even make dummy calls to vendors posing as a customer to find out how they generally treat customers.

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Another concern that consumers carry is what happens if they do not get good service or the if service provider claims ignorance about the deal? Whom do they go to? Websites claim to own the customer. In case a customer has a complaint, he should first get in touch with the website. "Most such websites ensure that the complaints are addressed because it takes a long time to get a customer and a minute to lose him," says Anisha Singh, explaining why such websites care for customers. Websites also have a process of blacklisting a merchant in case there are repeat complaints. Once blacklisted, the vendor will never again feature on that particular website.

How to stay safe

With internet penetration and e-commerce transactions growing, more and more customers are getting glued to these websites. However, consumers must ensure they deal with only the reputed websites that offer strong brands and services.

"A site you know about is likely to have safer practices than the one you haven't heard about," says Ashok Hegde, an online media consultant.

Finally, have the usual internet security measures in place. One should look out for https:// in front of the website's address, or check for a closed lock sign at the bottom right corner of your browser. Also check for third-party seals (Verisign Secure, for example) and do not transact on shared or public computers.

Buying online is as safe, or perhaps safer, than doing it offline. "In most offline transactions, you hand over your card at a restaurant or petrol pump, and it's pretty easy to steal your details," says Anisha Singh. Online transactions are encrypted and hard to hack.

"Also, remember, that you can dispute a fraudulent transaction that takes place on your card, and, in the absence of a signature, the onus is on the merchant to prove that you authorised the transaction. So, use a credit card and never a debit card for online transactions," says Ashok Hegde.

(This article was published in The Economic Times on 12 August 2011.)