When we compare between different companies, one of the most important parameter we use is their sales volume. Given the same type of business, the more one can sell, the more successful one is. And we believe that should be true for the group buying sites as well.

However, when I talked with a senior executive of a leading group buying site in China recently, he disagreed.  “One of the joke we used to talk among ourselves is that if you are group selling rmb 100 for rmb 99, you can sell as much as you want,” said the executive. Sure, you are willing to make a loss on every deal, your sale volume is virtual unlimited.

And currently, the margin for group buying sites in China is razor thin.  A venture capitalist told me the gross margin group buying sites is about 40% in Japan and about 30% in the U.S.  “But in China, it is only about 4%,” said the venture capitalist, “And I believe that is a bit overstated. Most of them are making losses.”

If comparing sales is problematic, what is the better indicator for a successful group buying site? “Internally, we use rate of repeated customer – how many customers buy from us again, rate of repeated merchants – how many merchants willing to do another deal with us, and so on,” said the executive. These seem to be indicators for service quality, rather than quantity.

For a company to be sustainable, it is important to have repeated business and service quality is the key of for getting someone to deal with you again. “Many people believe customers for group buying sites have no loyalty. They don’t care about who is providing the deals. But we believe they do. If they have good experiences, they will buy from us again,” said the executive.

My own experience with group buying was lousy. I bought a discounted ticket to an amusement park, but I felt cheated, as the quality was extreme bad. That is why I never do it again, and I have been skeptical about the whole idea of group buying ever since.

Certainly, group buying is popular in China. But how many customers are buying again? And how many merchants are willing to do another deal? Out of the 5000+ group-buying sites in China, how many of them really have a sustainable business?

No doubt the sector will be consolidating soon. “Next year will be the time for consolidation,” said the executive. “Will the one trying to achieve the highest sale volume survive or the one with the best service quality flourish? Personally, I vote for quality. But in the meantime, most people’s (including investors’) attention is on sales volume. If funding keeps flowing to them, they can make it, too, even when they are not providing a good service. In the long term, only a few strong players will survive, and I believe both quality and quantity counts.”

After the chaos of competition settles, the industry should have a brighter future. “Afterwards, we believe gross margin can be improved to about 10% percent,” said the executive.