Online Group Shopping - Who can make it work?

The online retail has been growing rapidly over the last decade and is dominated mainly by the travel, computer and electric equipment industries . Alongside industry giants like eBay and Amazon.com, dozens of small players exist, practicing various mechanisms such as auction, reverse auction, dynamic pricing, mass selling, and more.
Group purchasing is a special form of a dynamic pricing mechanism that mimics the general process of bargaining quantity for price. Since the dawn of history, buyers have been taking advantage of sellers’ enthusiasm to increase the number of units sold to a customer, at the expense of some of the margin they would made on selling each item separately. The seller calculates how much the certainty of selling those items is worth to him in monetary terms, and discounts the price for all (identical) items accordingly. This concept is rather straightforward, and is entrenched in our purchasing habits. Some “old economy” companies like Costco have been very successful following this guideline; however, so far there have not been any substantial successful attempts to harness the power of the internet to use this principle when instead of one customer there are many, each buying one product.

In theory, consumers benefit from additional buyers who join a buying group and thus will be incentivized to “pressure” peers to join, whereas retailers benefit from lowering cost of acquisition. Surprisingly, group-buying business models have been employed by quite a few companies to date and none of them has become a significant tool for consumers as to maximize consumer buying power. A famous group-shopping venture in 1999 that failed called Mercata was illustrated as a huge failure in addressing some key issues, specifically on the consumer side:
"[For] an analyst, Mercata was an incredibly neat idea. But for a consumer it is not so exciting, and the reason is that the deals were not worth waiting for."
-- Carrie Johnson, online retail analyst, Forrester Research (quoted from Cook, 2001)

Why the idea hasn't been successfully implemented by now?

In our online research, we tried to understand what the main challenges previous group shopping platforms attempts encountered, and what takeaways we could gather from them.
Our research indicates group shopping has many obstacles to overcome from the consumer point of view:
Ø “The mechanics of group-buying on the Internet prevent impulse buying due to the lengthy periods consumers have to wait”.
-We argue that today the lion share of transaction is non-impulse, especially with regards to high-ticket purchases.

Ø Group-buying business model is too difficult for the general consumer to understand.
-We argue that throughout the years online consumers have become more sophisticated in their approach to shopping due to massive exposure to different attempts to change consumer behavior.

Ø The primary value proposition of group-buying business models to consumers are the lower prices they can provide, due to the buyers’ collective bargaining power.
-We argue that customers are also looking for buyer experience. Buying with others can provide benefits of information sharing and social networking with peers.

Ø Frustration and fears - just as the name “group buying” tells us, if purchasing does not reach a critical mass, the pre-conditions for the success of this kind of business model will not be in place.
-Hence, we argue that Groupster business model should focus on type of transaction with a higher probability of success (e.g. avoid selling product that are too niche).

Source: The Efficacy of Group-Buying business models in internet-based selling by Robert J. Kauffman and Bin Wang , May 16, 2001