Groupon — from the words “group” and “coupon” negotiates deeply discounted deals with mainly small businesses and alerts its legion of e-mail subscribers to the offer, such as half off on a Swedish massage. The deal is triggered when a minimum number of users buy the voucher and consumers are rewarded if their friends purchase as well. The discounts run from around 50% to more than 90%, but the deal must be purchased within a limited time, usually 24 hours. To entice buyers, Groupon’s writers craft a zany ad in keeping with the Internet zeitgeist. “Creating a masterwork of art can be like wandering through a maze: After a lengthy period of reflection and contemplation, you’ll still probably starve, reads the 50% off ad for the Absolute Abstract art gallery in Philadelphia. “Appreciate an artist’s risks and transcendent joys with today’s Groupon.”
The deals and the drama have propelled Groupon into the e-commerce stratosphere. Founded in 2008, Groupon now reaches 25 million subscribers in 29 countries. The Chicago-based company serves more bargain-hunters than its biggest rival, LivingSocial, which has more than 10 million subscribers in the U.S., Canada, U.K. and Ireland. Dozens of similar sites have sprung up to tap the group-buying trend as well, including BuyWithMe, Dealster, SocialBuy, HomeRun, Tippr, DealOn, TownHog, MyDailyThread, CrowdSavings, Bloomspot, Scoop St., Twongo, EverSave, YouSwoop, You’ve Gotta Get It, TwoBuckDuck, DealPerk, FlyCoupon and many more. Other websites, such as restaurant reservation site OpenTable and companies like AOL and Cox Media Group are getting in on the act by launching their own Groupon-like services. (OpenTable focuses specifically on eating establishments). In a fragmented market with low barriers to entry, Groupon is by far the largest — for now.
But are group buying sites just a passing fancy that will end as quickly as today’s 70% off deal? Social commerce sites tap into the needs of both small businesses and budget-conscious consumers. The deep discounts and social nature of the deals appeal to the Internet-savvy, while local shops get mass exposure without the upfront marketing costs of newspaper ads or TV and radio spots. Groupon markets the deal and shares the sales with the business. Customer acquisition costs for small businesses are very high. Groupon allows small businesses to acquire customers in a fairly efficient manner. Moreover, the business model “leverages the power of social networking and collective buying in very natural ways that’s here to stay as well.
Group buying sites are not new, but previous incarnations failed to gain much traction with consumers. A high-profile flameout was Mercata, backed by Microsoft co-founder Paul Allen. The Bellevue, Washington-based company opened its online doors in 1999 to people who wanted to band together for discounts on products such as kitchen appliances. The items would start out at one price and as more users clicked to buy, the price dropped. But two years later, the company closed shop. Mercata founder Tom Van Horn said at the time that poor market conditions contributed to the firm’s demise. It didn’t help that social networking had yet to take off. Consumers weren’t familiar with the idea of online group buying, and Mercata also had to compete with discounted prices on the same goods from other e-retailers.
What makes group buying sites click today? For one thing, consumers are more comfortable with socializing and sharing information online, as the popularity of Facebook, LinkedIn and Twitter attest. The new sites also offer deals that usually cannot be found elsewhere on the Internet, such as 45% off on cupcakes at the corner bakery. Another difference: Groupon and similar sites reveal the amount of the discount upfront (although it’s only triggered if enough people sign on to buy the item).
Mercata’s customers, however, weren’t told the final discount until a certain number of people agreed to buy the product. Such tweaks to the business model make the latest iteration of group buying sites more likely to last, experts say.
That doesn’t mean there won’t be an industry shakeout. It’s already claimed SwoopOff, which merged with HomeRun. There are a lot of copycat Groupon models and it’s not clear all of them will survive. Consumers probably will pick a few good sites to follow instead of signing up for dozens of them. To rise above its rivals, such sites need to have a good brand name and reputation, he says. Small businesses will naturally want to partner with the site that has the biggest following; in turn, the greater diversity of deals will attract even more consumers. Meanwhile, the remaining sites will have to fight harder to get market share. Groupon has a significant head start the others are going to struggle with the issue of very few differentiators.
The space is very crowded but it’s all about scalability, and those that can scale their business will succeed. LivingSocial intends to stay in the game, even as smaller players drop off. But the dynamics of the market could change, and observers expect small businesses to begin crafting more profitable deals for themselves possibly at the peril of profits for partnering social commerce sites.
For example, Groupon negotiates with a small business to offer steep discounts, usually half off or more, and then takes 50% of the resulting sales. That leaves the business with at most 25% of sales to cover overhead and product or service costs. For many shops, that means the business will barely earn a profit or even lose money. If a spa offers 50% off on a $100 massage, for example, sales would be $50 per customer and Groupon takes $25. That leaves the spa with $25. Let’s say after paying the massage therapist and covering overhead and other costs, the spa loses $20 per customer. If 200 people bought the voucher and 70% redeem it, the spa’s loss would be $1,300.