Can established businesses beat Groupon for deals?
A new group buying business model aims to take dominance of the market away from the likes of Groupon, and enable more traditional companies to run their own daily deal offerings.
The phenomenal rise of Groupon could open up opportunities for established retailers and businesses to develop an run their own group buying operations.
Groupon’s rapid expansion has seen it develop in just two and a half years into a company planning a reputed US$20bn stock market flotation. Its revenue increased by 36% in Q2 this year to US$878m.
Despite this, the company has yet to make a profit and there are those who argue that its business model – with an ever-increasing outlay on marketing activity – is little more than a ‘pyramid scheme’ that will never become viable no matter how much income it generates.
This is where the opportunity for established businesses to develop their own version of the group buying model comes in, according to Jon Marchbank, CEO of Singapore-based Dealised, which offers technology allowing third parties to run a group buying service from their own websites.
He argues that, whereas Groupon has a high cost of customer acquisition and sends out huge amounts of untargeted emails, established businesses already have the elements in place to produce a more targeted offering.
“Groupon has done a great job in developing the market, but it sends everyone the same emails,” he says. “It’s pot luck whether they respond to it, and only a small percentage do. The challenge for the industry is to increase this and get more conversion into sales.
“Traditional companies have an existing base of loyal customers that they have a relationship with and they don’t have to spend the money Groupon is doing. The only thing they don’t have is the direct marketing expertise – which we can provide.”
Marchbank says businesses can use their customer knowledge and the level of trust they have built up to set up their own, more viable and targeted, group buying offerings.
He argues that the way forward is deals that are targeted by three main criteria: geographical location, age and gender.
“Postcode is particularly key,” says Marchbank. “If you live in one part of London and you are offered a restaurant deal in Mayfair, the hassle of getting there might over-ride the value of the offer. If they live in Richmond then you should send them an offer in Richmond.”
It could be argued of course that Groupon already targets its offers by location – at least by particular cities, if not specific postcodes.
Another criticism of the way daily deals have changed the marketing landscape is that they have created a move to blanket discounts to drive customer acquisition. If such newly-acquired customers have the permanent expectation of large discounts then it has huge implications for retailers’ profits and puts a question mark over the vailblity for merchants of the daily deal model.
However, Marchbank says that a group buying offering will benefit merchants by enabling them to adopt a similar inventory management model to that of airlines, who often discount their prices to sell unfilled economy class seats. Restaurants, for example, are often under-occupied on Mondays and Tuesdays, and can use group buying offers to boost trade on those days.
“The first step in customer loyalty is engagement,” says Marchbank. “And you can engage people with a targeted offer.”
He adds that daily deals can benefit companies who lack an online presence by getting new customers into their physical stores to redeem offers, and using this increased footfall to upsell to them.
He says that businesses already have a higher level of loyalty than group buying sites, and that if people are signed up with Groupon then they are also likely to be taking up offers from other deal companies such as LivingSocial and incahoot.
A number of UK businesses have already set up their own deal offerings such as the Daily Telegraph newspaper and DIY retailer Homebase.
In addition to Dealised – which has customers in the UK, Scandinavia, Australia, New Zealand, the Middle East and the US – Deal Co-op provides a similar offering in the US, supplying companies such as mobile operators and retailers with a software platform to offer daily marketing deals.
The way people like their group buying messages delivered varies by location. In Asian countries it tends to be a mobile/SMS-driven phenomenon, while in western Europe activity is still predominantly by email. However, Marchbank says this is likely to change.
“Location-based deals via mobile phones will increasingly develop, similar to what Foursquare has been doing,” he says. “Merchants themselves will be uploading deals and, rather than email, you will have an app on your phone to look at the deals.”
It will be interesting to see whether this business model can move the group buying market away from the likes of Groupon, and increasingly into the hands of more traditional businesses.
Groupon’s co-founder and CEO Andrew Mason claims it will be hard for rivals to penetrate the dominant market share it has built up. The company has over 83 million subscribers, although only 15 million of these have bought a coupon. It has sold a total of 70 million coupons.
The group buying sector is seeing increasing examples of rationalisation after an initial ‘gold rush’ phase. Smaller players are folding or being bought up.
There have been 37 acquisitions around the world in the online coupon industry in 2011 so far, compared with five in the same period in 2010, according to research company 451 Group.
The marketing for locally-based advertising that the deal companies are targeting is highly fragmented but potentially hugely lucrative. Size matters in the sector and, with the deal providers needing a big sales force to make contact with local vendors in major cities around the world, this has led to consolidation.
Google purchased discount aggregator Dealmap in July, while CrowdSavings.com acquired Kansas-based deal site Lucky Monkey; and LivingSocial bought TicketMonster, one of the biggest players in South Korea. Australian daily deals site Cudo recently went on sale, while US daily deals provider CityPockets has bought up rival service service DealBurner.