thoughts on the economics of group buys

[Mike Arman]

Just a few thoughts on the economics of group buys . . .


Group buys are cousins of quantity discounts - the idea being if you buy 
more of them, each one costs less.

This works very well with commodity items or mass-manufactured items. A 
perfect example of this is book printing - prices drop the longer your 
print run is, and the drop is significant. We are talking quantities of 500 
to 10,000 books at one whack - and I doubt chips for Audis in quantities of 
10,000 get sold on a regular basis.

This doesn't work with stuff you have to make or do by hand - if you have 
ten patients who have appendicitis, there's no group discount because EACH 
one is still exactly the same amount of work. There simply isn't enough 
savings in making ten instead of one. Also, this is something that can't 
wait - you do it when you have to, it isn't a discretionary purchase.

For group buys on this list, my feeling is that we are more toward the 
appendicitis model than the print more books model. Our quantities are 
simply not large enough.

A lot of what people try to organize group buys on are hand-made or very 
limited production items, and each one costs the same to make. In addition, 
often the quantity discounts TO the vendors (if they are not making this 
stuff themselves) are not significant at our group buy quantities.

Chips are a little different - There's more markup in chips, but the 
purpose of the markup is to compensate the software writer for his time and 
trouble - a good chip is NOT easy or fast to whip up. The blank chip costs 
only a few bucks, so even if you buy 100 of them, the quantity discount 
won't make much difference in the retail price.

Discounts on group buys for chips do tend to cannibalize the future market. 
If the vendor sells 10 chips today for 20% off, that's 10 sales he won't be 
getting at retail later - or is it? In some cases, he wouldn't get these 
sales AT ALL without the discount, so he's ahead by offering it - 20% off 
list price still leaves him getting 80% of retail, and that is 
significantly better than getting all of nothing.

Essentially, it becomes a toss of the coin - take a bunch of orders now, 
get a chunk of money all at once, or get perhaps half or two thirds of 
those orders scattered out over the next few months . . . eenie, meenie, 
miney, mo. Remember that some people won't buy at all unless they think 
they are getting a deal, and some people will go somewhere else.

The biggest problem with chips is that until they are installed, the buyer 
doesn't really have anything to go on except the sellers reputation and 
advertising - we don't buy dozens of different chips and swap them madly 
until we find one we like.

On heavy items, sometimes there are savings in freight or delivery cost, 
but on light items, those savings are small.

But then again, if business was easy, everyone would be doing it.

Best Regards,
Mike Arman