Collective buying: Great for consumers, but what about providers?

Social media is slowly being adopted amongst the hospitality industry, and the phenomenon of collective buying as developed by Groupon is serving to reinforce the fact that the times they are a-changing. But how much value will this new business model add to an industry already battling to remain profitable?

Social media, at this time in it’s evolution, is beginning to leverage the awesome potential it has for crowdsourcing and collective action. It’s a critical juncture, particularly for the hospitality industry, as these two worlds converge and begin to find some common ground.

But first, a little insight into the world that is hotels, with South Africa’s premier tourist destination, Cape Town as an example.

The Mother City enjoys a vibrant tourism industry. With our fantastic natural landscapes, culture and epic vistas, the city has long been a favourite destination for its fantastic food, wine, facilities and setting.

What made it more appealing and put the category of “long haul” destination out of mind, was the value. The pound, the dollar and euro’s strength made for awesome value and amazing holidays. But the FIFA World Cup changed a lot of things in the hotel industry in South Africa.

People started building more hotels. People thought they could charge an arm and a leg for their services. People were wrong.

Patrons voted with their wallets this festive season, with B&B’s and guesthouses near full, whilst 3 and 4 star hotels sat on dismal occupancy rate, some as low as 15% for the season.

Reasons? Well, firstly there is an oversubscription of 5 star properties. This led to too many bed nights in Cape Town at ridiculous rates, and when no-one booked, the 5 stars dropped their rates accordingly, which brought them in line with the rates of many 3 and 4 star properties. The results were obvious — who would stay at a 3 or 4 star hotel when they could get a 5 star at the same price?

Many foreign guests in this recession climate also budgeted accordingly, so that they could come to the World Cup … thus winter was peak tourist season for 2011. With the pricing so out of control in Cape Town for hotels, the folk from up north decided on cheaper holiday destinations that saw destinations like Durban and Plettenberg Bay take the lions share of the market.

At this stage, many in the industry are looking at collective buying companies and trying to judge whether it’s a good fit for them.

Services like Twangoo and Ubuntu Deal (and soon to be Groupon) offer “flash specials” on anything that can be sold. The model dictates that once they approach a company, they work out a very competitive deal on a service or product (a general guideline is at 50% off the regular price of the particular item or service). These specials then go up on their website for a limited time period and are only valid if a certain amount of units are sold within the time period.

So if a beauty salon offers 10 greatly discounted services and they are not all snapped up in the allotted time period, all the folks who have already bought the special get refunded and it becomes null and void. If on the other hand, say 60% are sold then the business has the option of going ahead and the patrons that have paid get issued their voucher.

Now this does seem a great idea as these services make use of vast, enthusiastic databases of customers whilst leveraging not just traditional e-mail, but Web 2.0 services such as Facebook and Twitter.

For an establishment that might exist in the “long tail” as opposed to a massive hotel group, this service seems ideal as it gives you big group marketing reach which allows you to offer discounted rates on services. The assumption is that the name of the business gets “out there” and the deal works because you are selling bulk at cheaper rates as opposed to a more expensive rate for less units sold.

The catch? Commission.

Most of these group-buying services ask up to 40% commission on the discounted selling rate, so if the product (at a discounted rate where the margins for the business are already extremely tight) comes in at R1 000 for example, the actual cost is R1 400, thus in all likelihood negating any profit (if there was any) for the smaller business.

Suddenly this looks a lot like other online business directories, just in different clothing and other than the exposure, offering very little else to the already stretched businesses.

So is this the solution for hotels trying to overcome low occupancy rates? Possibly. Will this lead to sustainable business practice with true benefit coming to the smaller establishments?

Definitely not in my opinion.

Moral of the story is this: Price correctly and they will come.

Social media is a great leveller and it is this that businesses should be leveraging to their own benefit at minimal cost, while not making the big 3rd party web businesses any richer.