Growing pains of group buying payment models

There is a new wave of online businesses appearing in Australia, including group buying websites, and for good reason. The Australian consumer has demonstrated their enthusiasm for online retailing, especially if a bargain is involved.

This emerging business model brings its own set of challenges to the traditional supply chain and financial management model. This is best illustrated as follows:

Figure: Group buying retailer payment model

Group Buyers operate on a slim margin, high volume ratio. For example if 200 customers take up a $100 offer and the supplier is paid $75 for each customer, the total revenue for the group buyer will be $20,000, with a total cost of $15,000 and a margin of $5,000.

One of the biggest challenges for group buyers lies in tracking the profit from each deal. This is due to the vast volume of transactions that take place for each offer, creating a significant amount of matching work to be carried out. 

This refers to the matching of data from the bank to the sale of each customer and also the matching of the total number of offers taken up against the amount owing to the supplier.  The catch is, all this matching work can get very expensive. 

There are three options on how to solve this problem:

1. Build your own system which does a 3-way match on each transaction automatically. This has to be very customised and can be difficult to adapt to new business models
2. Have a large team of people matching transactions. This team may be outsourced off shore somewhere like India or Vietnam
3. Do a high level match (total receipts for the day compared to total sales) and if they are within a certain tolerance, accept it without doing the matching work.

Deciding which of these is right for your business will depend on your business model, your product mix and the volume of transactions you have. For most businesses, a combination of these options will be the right answer.

For more information on how to set up the right payment model for you online business contact us to speak to one of our commercially experienced virtual CFOs