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Consumer Behaviour For Purchasing Online Group Deals Marketing Essay

4779 words (19 pages) Essay in Marketing

5/12/16 Marketing Reference this

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Groupon, which is derived from the combination of “group coupon”, is a newly rising form of ecommerce market. According to latest iResearch China online group shopping research report (2011), groupon website provides consumers with an extensive platform to purchase at a comparatively low cost. Because groupon is perceived as a form of electronic business rather than the specific website “Groupon” (groupon.com, which is the original and dominant company of this form of ecommerce), this paper prefers to use ‘online group purchasing’ to define this category of e-business, which can be helpful to differentiate from the specific website.

In the market of China, data (iResearch, 2011) indicated that 30.2% of total Chinese internet users, nearly 140 million consumers participated in online group purchasing in 2010. Also, the volume of trading amounted to 1.45 billion in 2010. Among the online group purchasing merchants, the website ‘Lashou’ led in the competition from most indicators. The tension was enhanced by participation from several social network services providers, such as sina Weibo, Renren, Kaixin, etc. Online group purchasing provides a platform for small or medium business to advertise on a low budget, which is the informational value of these coupons (Narasimhan, 1984). This business mode will probably become an influential one in the electronic market.

Groupon, coupon and deals can be seen as similar but slightly different promotion instruments of merchants. Essentially, online group purchasing is a category of coupon distributed by Internet. Online group purchasing websites act as an intermediary of business, they connect the merchants who are willing to provide deals and select reliable deals to post online. Initially, one deal would be offered in a specific city on a daily basis. As the commercial scale booming, the number of deals rose and available cities increased. Once the customers decide to take the advantage of deals, they need to pay online first, then they will receive a voucher code, after that, they redeem the voucher directly from the merchants. Additionally, the deals are only activated while the numbers of purchasing reach the pre-setting limit, for example, 10 consumers. The websites will proportionally charge agency fee as a medium.

The main difference between coupons and online group deals is payment timing. Traditionally, coupons are paid when consumers enjoy the services or goods, while online group deals have to pay upfront. This is also the difference between ecommerce and traditional offline business. Because of this difference, the analysis of redemption rate is thereby changing into analysing the purchasing rate of online deals. Due to convenience, the remaining essay will not distinguish these two definitions. That means, redemption rate of online group deals also means the purchasing rate. More importantly, problems of trust will be generated under such environment, which possibly influence the redemption rate (Brynjolfsson and Smith, 2000). Grabner-Kraeuter (2002) even suggests trust is the determinant of electronic business.

Researchers reveal that the main purpose of couponing is informing the existence of the merchants and attracting trial-repeat purchase (Narasimhan, 1984; Edelman et al. 2010). Similarly, online group deals share the same purpose and benefit. Casual empirical evidences that little famous merchants offer discount on Groupon support this argument. Moreover, Mulhern and Padgett (1995) provide empirical evidence that support one of the tasks of online group purchasing is advertising. They analyse the relationship between discount-priced products and regular-priced products. The statistically significant result shows consumers tend to spend more on the regular price goods when they are spending money on the promotion goods. Namely, by offering discount promotion, the merchants attract more consumers. That may be the reason why online group purchasing is so heated and attracts both consumers and retailers.

Previous studies mainly concentrate on coupons/deals rather than online group purchasing due to the novelty of e-deals. Prior research is productive in the motivation analysis of redeeming a coupon. Initially, scholars pay attention to the demographics (Webster, 1965; Blattberg et al. 1978; Narasimhan, 1984). Later, customer loyalty captures the researchers’ attraction (Webster, 1965; Shoemaker and Tibrewala, 1985; Bawa and Shoemaker, 1987a). A strong and clear relationship between loyalty and redemption rate is constructed, while the demographics’ effects are still mysterious. In the meanwhile, face value (Ward and Davis, 1978; Shoemaker and Tibrewala, 1985; Bawa and Shoemaker, 1987b; Bawa et al. 1997), underlying products (Bawa et al. 1997) and expire date (Inman and McAlister, 1994) are found that these features adhere the coupons will result in various possibilities when consumers redeem them.

Gaps in prior research

There are a variety of promotion methods not only online but also offline market. Due to the similar nature and essence of these promotion instruments, Blattberg and Neslin (1990) suggests all coupons and online group purchasing deals should be named as deal, and those who are incentive to seek promotions should be regarded as deal prone consumers. However, they believe different types of deals can generate different responses. In other words, consumer behaviour may be different and specified relating to the exact category of deals. Moreover, Mayhew and Winer (1992, cited in Lichtenstein et al. 1997) result that a household probably reacts positively to coupons, but is less willing to take other promotions instruments. Therefore, although online group purchasing deal is similar with coupons, it is necessary to study on this specific type separately.

Secondly, past articles on online group deals focused on the profitability of groupon rather than the customers’ purchasing behaviour (Edelman et al. 2010; Gupta, 2012). That is a perspective from the operator. It will be necessary to examine the consumer behaviour in such field.

Thirdly, previous studies analysing redemption behaviour are mostly based on the unit of household. As the online group purchasing activity relies on technology knowledge and attracts more youngsters who are not married, this analysis may be better based on the unit of individual person. Additionally, the focus of this paper is Chinese market.

Therefore, this article aims to analyse the consumer purchasing behaviour of online group deals and provide a behaviour decisive factors model for online group shopping. Basically, the demographic characteristics of consumers will be examined. Moreover, this essay will define a new concept, channel loyalty, and test the relationship between this variable and online group deal proneness. Similar to brand/store loyalty, channel loyalty infers that consumers become loyal to a specific shopping channel, for example, online shopping, which indicates that consumer’s preference level will remain as they keep shopping online increasingly.

In this paper, we argue that demographics may affect but not the decisive factors of consumer behaviour. Consumer behaviour is also influenced by the past purchasing experience, especially channel loyalty. Hypotheses will be assumed according to the past research and tested by statistics. Finally, the result supports the effect of channel loyalty but the results on demographics are mostly not significant. In the second part, past research on consumer behaviour and the distinct features of such new environment, ecommerce, will be demonstrated. In the third and fourth part, hypotheses and research method will be mentioned. After that, the fifth and sixth part will indicate empirical test results and relative discussion. In addition, a purchasing behaviour model will be derived in the sixth part. Managerial implication will be recommended in the seventh part. Lastly, the limitation of this paper and future studies’ direction will be discussed.

2. Literature review

Studies focused on online group purchasing are limited. As an advanced form of coupons/deals, purchasing the group deals is essentially similar with redeeming a coupon, which just makes the payment in advance. Thus, to analyse online group purchase behaviour, review of prior research should concentrate on the redemption behaviour of coupons/deals. Meanwhile, ecommerce market features should be taken into consideration while discussing the distinct parts.

2.1 Redemption Behaviour

Prior studies on consumer behaviour towards coupons or deals focus on two main aspects. One is redemption behaviour of coupons or deals, these studies often analyse empirical data or construct models to demonstrate which categories of consumers are deal prone (Webster, 1965; Montgomery, 1971; McCanne, 1974; Cotton and Babb, 1978; Blattberg et al. 1978; Teel et al, 1980; Narasimhan, 1984; Shimp and Kavas, 1984; Shoemaker and Tibrewala, 1985; Bawa and Shoemaker, 1987a; Mittal, 1994). The second aspect is repeat purchasing (Shoemaker and Shoaf, 1977; Bawa and Shoemaker, 1987b; Neslin and Shoemaker, 1989; Graham, 1994; Taylor, 2001).

In terms of redemption behaviour, two streams can be isolated (Bawa et al. 1997). First, the main stream is from the aspect of consumer. For instance, analyse the consumer’s demographics and other characteristics. Second, concentrate on the coupons or deals themselves, such as expiration date, attractiveness, face value analysis.

2.1.1 From the perspective of consumer

In terms of consumer’s actions, according to Mittal’s framework (1994, pp.533), redemption behaviour can be analysed by four categories of “individual-difference variables (IDVs)”:

“Objective IDVs”: basic demographics, such as income, educational level, family size, age, etc.

“Subjective IDVs”: what consumers self-perceive they are, such as involvement degree of media, creativity, risky spirit, etc.

“Domain IDVs”: factors influence their purchase behaviour, such as past purchase experience, sensitivity of price, etc.

“Cost or benefit perceptions”: personal attitude towards the gain or loss of purchasing, such as consumer surplus, consumer satisfaction.

Under this framework, topics that based on objective IDVs and domain IDVs are most frequent targets in prior research. Basically, the review of previous consumer redemption behaviour studies will follow this framework.

2.1.1.1 Demographics

Firstly, a huge number of scholars pay attention on demographics. However, the result of this aspect remains controversial. In early studies, Webster (1965) firstly sets up a measurement of deal proneness and then run regressions to correlate the data. He finds that four demographic characteristics, income, education, female employment and family size, are not significant, but the result suggests a housewife will be more likely to be a deal prone when her age increases. An explanation offered by Webster (1965) is that younger women will be less expert in searching deals, thus, the search cost of a deal will rise. Likewise, McCanne (1974) analyses income, employment status of housewife, household size and age of housewife but find that they are non-significant.

Cotton and Babb (1978) analyse a wide range of demographic characteristics simply. In their research, geographical features, occupation and income level vary across different variables and do not show a significant relationship with deal proneness. Amounts of family members and educational level show negative relationship with deal redemption rate, but housewife employment status positively relates. More strikingly, non-white people are more likely to take the advantage of deals (Cotton and Babb, 1978).

Another study shows a family with children or employed wife will not take advantages of coupons due to these activities will cost a great amount of time (Blattberg et al. 1978). Additionally, Blattberg et al. (1978) analyses five different usually bought goods and finds that a larger percentage of households with cars and houses are deal prone than those without cars and houses. This empirical data shows household resource variables are effective predictors of consumer behaviour. Similarly, higher income households are more likely to deal prone. However, they found that the youngest children’s age and the occupation of hostesses are less important to decide their behaviour relating to coupons. After that, Teel et al. (1980) reach a conclusion that members from larger family, with larger income and younger age, are probably use coupons. It implies that the finding of Teel et al. supports Blattberg et al. (1978) at the issue of income. Also, Teel et al. (1980) attempts to research on the two other variables, which are education and housewife employment, but they fails because the result is non-significant.

In order to support the hypothesis that coupon users are more price elasticity, Narasimhan (1984) tests the demographic features of coupon users. After analysing his data across various categories of daily use products, Narasimhan (1984) draws an opposite conclusion towards Cotton and Babb (1978) that education is significantly positive related to deal proneness. The opinion on income effect is similar with previous studies except Blattberg el at. (1978). Moreover, Narasimhan (1984) focuses on the influence of children in household and he indicates that children will increase the possibility to purchase with coupons. Meanwhile, Narasimhan’s study (1984) reveals an indicator of coupon proneness, that is, consumers will face a trade-off when collecting the coupons. If the coupon-using cost is lower than the obtained saving, people tend to redeem the coupon and earn that benefit. Otherwise, consumers will prefer finding other saving methods.

Bawa and Shoemaker (1987a) collect seven product classes based on the unit of household and they imply that demographic characteristics are decent predictors of consumer redemption behaviour. Consistently with the hypothesis, less educated, lower income, suburb, smaller family consumers are less expected to be coupon proneness. The other three tested variables, which are housewives’ personal features (age, employment and childbearing history), are non-significant in the test.

To summarize, the demographics test results vary from period to period and from researchers to researches. At a glance, the effect of income seems to be consistent in prior studies, Blattberg el al. (1978), Teel el al. (1980), Bawa and Shoemaker (1987a) suggest the positive relationship with deal/coupon proneness. The other scholars do not draw a totally opposite conclusion against these three articles. Moreover, geographical characteristics and presence of children are the field that less likely to be explored. Due to the different of dataset, researchers will continue to present different but inspiring conclusions in this topic.

Additionally, Mittal’s (1994) attitude towards demographics is comprehensive. On one hand, Mittal (1994) insists that demographic indicators are poor when estimating the behaviour. He prefers to research on the reason coupons are used rather than the demographic characteristic of coupon users. On the other hand, he presents a causal model in his article (Mittal, 1994) that demographics is the mediation of consumer behaviour. It mediates subjective and domain individual-difference variables, even costs/benefits perception. Then, it contributes on coupon attitudes. However, he insists that demographics could not be the starting point of this process. Overall, it implies that future research should notice the influence of demographics, but cannot only concentrate on the demographic characteristics.

2.1.1.2 Subjective IDVs

In this field, the achievement of consumer redemption behaviour is less productive than demographics (Mittal, 1994). Subjective IDVs can be seen as psychological characteristics. Montgomery (1971) conducts a research on demographic, psychological features and purchasing behaviour (domain IDVs) and reveals that all variables of subjective IDVs are not significant at the whole study. Remarkably, gregariousness, venturesomeness and media involvement positively relates in the first phase of the research, but in the second phase, they become insignificant statistically. Also, McCanne (1974) involves testing creativity in his research. However, non-significant result cannot provide any convincible explanations for the relationship between psychological characteristics and deal-prone consumers.

2.1.1.3 Domain IDVs

Domain individual-difference variables are traits that derive from past purchasing experience. As the second highest attention topic in consumer coupon/deal redemption behaviour, past purchase behaviour is a more stable indicator of consumer behaviour according to the prior conclusions.

Webster (1965) uses two independent variables to access the brand loyalty, one is percentage of the loyalty brand products to total units and the other is numbers of different brands bought. The result of regressions shows that tendency to deal prone negatively correlates with the first variable and positively relates to the second one. This significant statistics data reveals that consumers are less likely to take the deals and change the purchased brand because of brand loyalty. It also implies that brand switchers, who have a high number of purchased various brands, are more likely to be a deal proneness. In addition, Webster (1965) examines the total purchased units as well. Contrast with the rational thinking, larger amounts purchasers are probably not deal proneness, proven by the statistics. Webster (1965) explains that large usage rate may result in less controllability of purchasing timing. In other words, bulk purchasers cannot wait until the deal appears because they need to keep the inventory level at a large amount. In addition, Webster (1965) also examines the other factors, such as the number of shopping trips, but these factors are not significant in his model.

Montgomery’s study (1971) only has one significant variable, brand loyalty of Crest before endorsed by American Dental Association. It claims that loyal customers will negatively be a deal proneness. This idea supports Webster’s (1965). Moreover, McCanne (1974) demonstrates that usage rate should be positively related rather than negatively related and loyalty factors will keep consumers away from deals. Nevertheless, data of McCanne is non-significant at the 5% significance level and leads to a less acceptable result.

A decade later, Shoemaker and Tibrewala (1985) indicate that most coupon-redeemed consumers have past purchased experience with the chosen brands. An implication can be suggested that more prior purchasing, more loyalty, thus more redemptions. Likewise, Bawa and Shoemaker (1987a) analyse not only demographic features but also domain IDVs. They claim that both brand loyalty index and store loyalty index are higher in the segment of non-coupon-prone customers than the segment of coupon-prone consumers. This result is accord with the previous research and strengthens them.

Another exception of consistent result is that Teel et al. (1980) support the negative impact of brand loyalty as well, but the data is surprisingly non-significant at store loyalty variable. Additionally, if a consumer is more sensitive to price, he or she will choose redeem a coupon (Teel et al. 1980).

Overall, the conclusions are consistently significant till now except the period of 1974~1980. It should be noticed that the research in those periods is not opposite but just insignificant statistically. Hence, a trustable conclusion can be drawn that brand loyalty can prevent consumers from redeeming coupons.

2.1.1.4 Cost/benefit perception

During recent three decades, the researchers transfer their focus on utility perception theory (Mittal, 1994). Shimp and Kavas (1984) argue that more money-saving and less time consuming when seeking a coupon lead consumers to coupon prone. Narasimhan (1984) concludes that the redeeming decision is based on the individual tradeoff between search costs and savings obtained. He directly relates the cost of coupon to the opportunity time of finding deals or coupons. In addition, Lichtenstein et al. (1997) shows that it is cost effective to only focusing on a certain amount of deals. If deal prone consumers try to target more, the cost will increase but the rise of savings cannot be guaranteed.

Moreover, due to the low price, consumers probably regard the underlying products as cheap, unqualified or inferior ones, thus the purchasing and redeeming behaviour are interrupted (Lichtenstein et al. 1993).

2.1.2 From the perspective of coupons/deals

Spotlights of redemption are almost on analysing the consumers performance, few scholars concentrate on the coupons/deals themselves before 1980s. Recently, academic research begins to focus on the characteristics adhere the coupons.

Firstly, face value of the coupons attracts the scholars. Traditional wisdom nearly reaches the same conclusion that higher face value is associated with higher redemption rate of coupons (Ward and Davis, 1978; Shoemaker and Tibrewala, 1985; Bawa and Shoemaker, 1987b; Bawa et al. 1997). However, the effect on redemption rate maintains in a same level once the face value reaches certain interval (Bawa and Shoemaker, 1987b).

Secondly, underlying product becomes a factor that influences the redemption behaviour. The research of Bawa et al. (1997) indicates that if the underlying product of the coupon is a product with high usage rate, it will be more attractive to consumers. Consequently, a large amount of users will redeem the coupon. Besides, in Gonul and Srinivasan’s paper (1993), statistics significantly suggests that perception of coupon value refer to the brand of underlying products.

Lastly, redeem timing research promote the strategies depicted for managers. Under the framework of regret theory, Inman and McAlister (1994) hypothesize that the redemption rate will rise just before the expiration date because customers will regret if they fail to benefit from the coupons. They theoretically and empirically prove the hypothesis, which is in contrast to prior research that rate of redemption may be largest in the initial period (Bowman, 1980). This finding provides implications that managers can present various expire date to construct suitable couponing strategies. Furthermore, Gonul and Srinivasan (1996) get rid of the limitation of specific promotion, they consider long term vision and demonstrate that there is a tradeoff between redeem currently and wait till next period. Inventory, stockout cost and expectation of future coupons influence the redemption behaviour.

2.2 On the context of ecommerce

Traditional wisdom about the coupon redemption mostly analysed the offline market, in which coupons are based on paper version and distribute by mail, leaflets, TV advertisement, etc. Online market shares some identical features but speciality of ecommerce should be noticed when analysing the online group purchasing behaviour.

In terms of commerce, low search cost, trust, lock-in and novelty are four key factors that will affect the consumer purchasing behaviour.

2.2.1 Low search cost

Salop and Stiglitz (1977) introduce the concept of market segmentation by information. That is, informed consumers pay less by shopping at low-priced store or coupons while uninformed customers suffer a higher price by randomly selecting a store or not using coupons. More importantly, high-priced stores will lose their market shares gradually due to word-of-mouth transition of information, which will convert uninformed consumers into informed ones. Therefore, price discrimination in such case is temporal. Varian (1980) enhances this conclusion that randomized pricing strategy, which raises search costs, should be taken to remove the ability of customer learning.

Schmitz and Latzer (2002) analyse previous research and find that it is easier to obtain information in ecommerce than brick and mortar market. Bakos (2001) claims that ecommerce market with low search costs will facilitate intensive price competition. However, the price competition may be reduced by raising tacit collusion between online merchants (Varian, 1999, cited in Schmitz and Latzer, 2002; Kauffman and Wood, 2001). Additionally, low search cost effectively increases the ability of inter merchants scrutiny in ecommerce market.

One technology to reduce the online search cost is price comparison websites. However, the lower search cost mechanism does not always work. Baye and Morgan (2000) find that the prices shown on the price comparison websites are lower than merchants’ own websites. They hypothesize that the price comparison website is a monopoly gatekeeper of information (Baye and Morgan, 2000). The firms have to pay a certain amount of fee to display their prices on the price comparison websites, in order to earn more click, the displayed prices will be reduced so that they can attract more consumers. Despite that, the special fees generated by ecommerce, such as shipping fees, may contribute to the inconsistence of price.

2.2.2 Trust

Urban et al. (1998, cited in Brynjolfsson and Smith, 2000) believes that credibility essentially affects internet marketing. Similarly, Brynjolfsson and Smith (2000) examine whether the e-market is frictionless and draw a conclusion that trust is still important because the internet market isolates participants spatially and temporally. Furthermore, Grabner-Kraeuter (2002) argues that the decisive variable for success of ecommerce is trust in the near future.

Empirically, consumer behaviour towards price comparison websites can explain the importance of trust. Smith and Brynjolfsson (2001) study 20,268 book buyers and find that they prefer larger brand sellers rather than lowest price, which price advantage is about $1.72. According to this statistics, brand can be seen as a proxy for credibility and quality for merchants. In that case, ecommerce has to encounter a more severe problem- trust rather than price elasticity.

2.2.3 Lock-in

A great amount of online merchants provide different kinds of programs, such as Amazon Prime, to lock the consumers in. Typically, online firms offer free credit when you spend a specific amount, which enhance the difficulty of switching. More specifically, the recommendation reward, free credit for recommending a deal, is set up by the online group purchasing websites. Lock-in generates brand loyalty and consumer trust, which are invisible assets of a firm (Amit and Zott, 2001). Consumer learning prohibits consumers from switching merchants (Smith, Bailey and Brynjolfsson, 1999). The data of Amit and Zott (2001) supports this opinion. Further, Amit and Zott (2001) indicate that consumers will be loyalty to the online merchants because of customization.

Another form of lock-in is based on interaction that it will be harder for brick and mortar to perform in the same way. Hagel and Armstrong (1997) argue that e-communities that created by online merchants effectively connect the consumers and sellers. This can be seen as a positive network externality, which is defined as ‘the utility that a user derives from consumption of the good increases with the number of other agents consuming the good’ (Katz and Shapiro, 1985, pp.424). Online group purchasing websites can simply reach this goal by designing a bulletin board system (BBS).

2.2.4 Novelty

Amit and Zott (2001) indicate that ecommerce innovate the business model and structure the business transactions against the traditional market. E-business market attracts new participants and depicts new relationship between products, services, information, seller and consumers (Amit and Zott, 2001).

Low search cost reduces the consuming time to search deals. More precisely, shopping guidance websites directly lead customers to suitable online group purchasing deals. Additionally, lock-in effect increase the brand and store loyalty. According to the review of consumer redemption behaviour, customers with low searching cost and more loyal tend to be deal proneness. By contrast, problems of trust and new system may prevent those less risky consumers from buying online. However, these results are based on logical reasoning followed the prior research, so the relationships are yet to be confirmed by data or evidences.

3. Hypotheses

A great number of previous literature show that the correlation between demographics and deal proneness remains controversial. So the demographics will be re-examined in this paper. According to results of literature, the assumptions are made as below:

H1: Gender affects the tendency to purchase online group deals. More precisely, female tends to capture a deal rather than male.

Traditional wisdom focuses on the household as a unit of observation, thus, the gender difference do not explain but the analysis of housewives’ employment, education and age is the highlight of past studies (Webster, 1965; McCanne, 1974; Cotton and Babb, 1978; Narasimhan, 1984).

H2: Age negatively impacts on the deal prone. Older people are less skilled in computer and do not accepted the transaction style of ecommerce, which is a new shopping mode.

H3: A Bachelor degree holder probably purchase online group deals because of owning adequate computer skills.

Online group purchasing requires the basic knowledge of searching online and making payment via online banking. By contrast, the traditional coupons are distributed by easy accessible method. Therefore, age and education may be good indicators that the knowledge consumers own.

H4: The less monthly expenditure is, the more probable to purchase online discount deals. Those spending more monthly will do not restrict their purchasing behaviour by chosen deals.

This assumption seems adverse towards the previous findings (Blattberg et al., 1978; Teel et al. 1980; Bawa and Shoemaker, 1987a). They suggest higher income implies more controllable resources for taking the advantage of deals (Blattberg et al., 1978). However, according to Lichtenstein et al. (1993), consumers perceive price promotion products as inferior goods. In China, the ‘face’ (Hofstede and Bond, 1988, pp. 8) is very important especially in upper class. Consequently, the higher income class, which is probably the higher expenditure class, may regard online discount deals as inferior products, thus prefers to pay at regular price for the perceived superior products. Moreover, the variable, expenditure, reflect the purchasing value more exactly than the variable income. Thus, this paper chooses expenditure as a testing variable.

H5: Purchasing behaviour of other ecommerce forms, such as taobao (Chinese ebay), positively increase the purchasing times of online group deals.

Although online shopping did not develop in last few years, some consumers still biased against electronic business in China. In other words, if a consumer has not yet bought goods online before, he or she probably refuses to purchase such discount deals because of cheating in ecommerce. On the other hand, if a consumer is accustomed to shopping online, the likelihood that he or she purchases an online group deal augments. This behaviour can be defined as channel loyalty. Hence, we assume that the number of purchasing other forms of ecommerce has positive relationship with the amount of buying electronic group deals.

4. Research method

In order to explore the relationship between purchasing rate of online group deals and gender, age, education, monthly expenditure, frequency of shopping online, the author gathered information and data by sendi

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