Collective buying is not really a new idea.  At its simplest level, collective buying entails individual consumers banding together in order to get bulk or group discounts.  If you buy 1 taco, it’s $3.50, but if you buy 100 tacos, it’s $175.

Tragically, not many individuals can commit to buying 100 tacos at the same time, so they end up paying the $3.50 rate, as opposed to the $1.75.

But that’s where the Internet comes in.

Companies like Groupon (Chicago), TownHog (San Francisco), and Living Social (Washington, DC), are attempting to leverage the unprecedented speed, ease, and low cost with which news of a deal can circulate among friends via social media services like Facebook and Twitter, to bring collective buying mainstream.

If you’re a merchant, there’s a lot to love about collective buying.  In exchange for offering some minimum number of consumers a steep discount, merchants get new customers, people buzzing, twittering, and facebooking about their store, and cash collected.  As an added bonus, just like in the mail in rebate model, some percentage of those people buying the deals will never show up.  It’s like advertising, marketing, and promotion all packaged into one, only instead of you having to dish out cash, you receive cash up front.

And the model isn’t too shabby from a start-up’s perspective either.  Collective buying has a built-in business model.  The startup takes a cut of the cash collected when the consumers buy the deal.  And from an operations perspective, all you really need to do is 1) sign up deals; and 2) build an email list to blast out said deals.  This is a sales and marketing play posing as a technology startup.

But because of the killer business model and glorious clarity of the value provided to all sides of the transaction, collective buying is a mad arms race right now.  Groupon, the space’s largest player, has already raised $30M on an alleged pre money valuation of $250M.  Living Social has raised a total of $10M, with $5M coming just this month.  TownHog is backed by some of Silicon Valley’s highest profile angels.

So where does location come in?  This is where I think things start getting really interesting.

Because these deals are occurring at brick and mortar merchants, with real lat long and addresses associated with them, it’s only a matter of time before location becomes a differentiator.  As a consumer, I am clearly more interested in the deals near me, than I am in ones on the other side of the city.

I can think of a number of ways how location could be woven into the offerings of these startups.  My guess is that we will soon start seeing some experimentation in this area.

Collective buying is one of the really compelling stories happening in startup land right now – indeed, if Groupon were based in Silicon Valley or New York, they’d probably be getting as much buzz as Foursquare.  It’s rare that a model emerges with with such a clear value proposition for both businesses and consumers, and a gorgeous revenue model to boot.

I will be following this space with interest, and not only because of the disclosure below.

Disclosure: I am married to a co-founder of TownHog.

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• Groupon Lets You Get Great Deals and Discounts in US (gajeebo.com)
• LivingSocial grabs $5 million more to expand group-shopping deals (digital.venturebeat.com)