01/25/2011 10:06 am ET Updated May 25, 2011

Group Buying Versus Traditional Lead Generation

How does group buying generate quality leads? Lead generation is a key consideration for any small business's marketing and advertising approach, and should also be examined when deciding if group buying is a good approach for your business.

In my last post, we looked at the cost of a group buying deal and how it compares to costs of traditional advertising. To determine how group buying weighs in as a lead generation tool, let's compare three popular lead generation techniques -- free trials, paid lead generation and rented/purchased email lists -- to group buying in terms of cost, success in getting new customers, developing long-term value, and ability to measure results.

Let me begin by saying that I'm a big fan of good lead generation, so don't take my promotion of group buying as an indictment against other forms of lead generation. However, in many instances group buying provides superior value as a lead generation tool, because of one key benefit: it produces a paying customer.

Free trials

They are everywhere, online and offline. You can't listen to the radio or browse a web page for long without getting an ad for "15 days of online data backup for free" or a "30-day Try It Free" trial for web meetings. Companies spend tens of thousands of dollars on banner ads, radio spots, site design, direct mail and more just to give away their product or service, all for the prospect of converting a free user to a paid user. There's marketing costs, set up costs, customer service costs all aimed at getting you to buy. And that's before you pay the sales team to contact the prospects and convert them to paying customers. Conversion rates vary, but 30-40 percent is considered excellent, so for the best programs you are only getting a new customer one out of every 2.5-3 tries, and that's after a heavy-duty selling effort.

With a group buying deal, you get a paying customer, or at least a partially-paying customer, so you start out ahead of the free trial game. The buyer has paid something for the coupon, so you've already overcome at least part of the "perceived value" pitch, and if the buyer ends up being one-and-done, at least you got something for your efforts. You also didn't have any costs up front for advertising or selling, because Groupon or LivingSocial or OfficeArrow did that for you. Try getting a popular talk radio host to pitch your service on a cost-per acquisition basis.

Paid lead generation

With paid lead generation, a common technique is to pay firms a fee for each lead they provide, then it's up to you to turn that lead into a customer. The typical price for a good lead can be anywhere from $30-$50, or higher in some cases. Success depends on the accuracy of the lead information, how quickly the lead is followed up, how far into the buying process the lead is, etc. Success rates run from 20-50 percent at best. You pay for leads when you get them, not when -- or if -- the sale is made. As with free trials, leads typically require a sales team to make the calls and close the sale; it's a process that hopefully leads to a sale, but more often than not it's just a hard out of pocket cost and a lot of effort.

A group buying deal matches the expense with a sale and a customer, and allows the sales force to concentrate on making the next sale to someone who is now an existing customer. Most say that it's five to seven times easier to make a sale to an existing customer, so you can do the math (this of course is the same theory that drives the math behind the free trial.)

Purchased email lists

Lastly, you can purchase email lists at varying rates, and with widely varying success. I have seen marketing teams declare victory when an email campaign yields a 1 percent success rate! Thousands of dollars are spent sending emails to millions, hoping that a few hundred will become paying customers. Cost to purchase the list; cost to send out the emails; spam compliance and complaints; cost to follow up and make the sales pitch and, if all goes well, a close rate of 1 percent.

Group buying changes the dynamic completely, because a group buying email list is comprised only of email addresses that opted-in. This means the person requested to receive the email that contains your offer. Group buying is sounding better and better, isn't it?

In closing, the questions for group buying are the same with any lead program: Did I get a customer? Was it cost-effective? Can I measure it? Do I develop a long-term customer relationship at a lower cost than it cost me? Measured against other popular lead generation methods, group buying holds its own quite well.

While group buying is not a panacea, I remain firmly convinced that it represents a breakthrough in lead generation and is here to stay, as it should be. The ultimate success rests with customer retention and repeat sales, but I like the odds that group buying provides: a paying customer for every dollar I spend.