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A re-think on Daily deals business: Unsustainable? Or a tight margin business proposition for the future?

Posted in Collective Buying by Manas Ganguly on September 13, 2011

Even before the daily deals business has really taken off, there are casualties as some of the big names (Facebook Deals) seem to dropping off and some others such as Google Offers seeming to be loosing big money fast. Then there are others such as Yelp who have restructured the deals business and chopped the number of offers it runs.

The latest reports seem to indicate troubled times at Google offers as its revenue per deal fell 37 percent, driven by a 46 percent slump in the number of vouchers sold per deal in the third month of its operation.Total revenue generated by Google Offers dropped 23 percent in August from July despite a 22 percent increase in the number of daily deals run.The average price of Google Offers vouchers increased 18 percent, but it remains “far below” that of Groupon and LivingSocial.That means less incentive for business owners, and despite the lower costs, users still aren’t biting.This despite 9 percent revenue growth in the North American daily deal industry.

In contrast, Groupon gained market share in August. Revenue was $120.7 million in North America, up 13 percent from July.LivingSocial revenue in North America slipped 3 percent to $45.1 million in August, Yipit data show. Groupon’s market share increased to 53 percent in August from 51 percent in July, while LivingSocial’s market share declined to 20 percent from 22 percent. Amazon Local generated more than $1 million in revenue in August, despite being active in only a handful of markets for the full month.

Two observations on the daily deals scene that now unfolds:

1. No matter how large and influential the challenger be (Consider Facebook and Google), it is the first mover that seems to be holding the edge in the daily deals market unless the challenge is very limited and relevant to a niche.
2. There are reasons to believe that at times of economic slowdown and uncertainty, the number of daily deals would actually increase though the ticket sizes may actually come down. Thus a trade-off between deal volumes and deal value.
3. Given that Groupon has deferred its public listing, this has given some reprieve to the bubble scenario which was building fast. It would be interesting to follow Groupon and LivingSocial and see how they walk the tightrope between operational efficiency and wafer thin margins.

What does closure of Facebook Deals imply for the daily deals business?

Posted in Collective Buying by Manas Ganguly on September 1, 2011

A few months back, i had covered the daily deals business to some depth and posted a few blogs around the industry and the trends. Groupon with its multi billion valuation seemed to be hogging the headlines, albeit for wrong reasons. A bubble was suspected.Four months after a euphoric launch, Facebook Deals closes shop. Is it merely operational intricacies of a discount business? Is it?

(Reproduced from a Fortune Blog)

Facebook’s announcement of closing its local deals business merely four months after it started has sent mixed signals for the future of the daily discount business.While deal giant Groupon should naturally be happy that it has one less competitor to fight against (a big one too, with over 750 million users!), the decision also raises questions on whether capital-intensive daily deals are a viable option in the long term.

Facebook Deals was competing with other large companies in the daily deal segment such as Google, Groupon and LivingSocial, along with hundreds of other daily deal clones worldwide.

Facebook’s closure of its local deals business is good news for Groupon, which has seen numerous competitors enter into the local deals sector due to extremely low barriers for entry. With over 750 million users, Facebook has a tremendous network and scale effect which it could take advantage of to bring in more subscribers compared to Groupon’s existing subscriber base of over 115 million.

With its core business centered around bringing people together, Facebook clearly overshadowed Groupon in terms of its social media reach, which could have translated into group buying initiatives. Facebook’s exit is also a loss for smaller deal sites such as ReachLocal and Gilt City, which were promoting their deals through Facebook.

But It Also Reflects the Enormous Challenge of Reaching Profitability

The Facebook Deals closure also indicates how even big tech companies with multiple (stable) sources of income are finding local deals to be exceedingly challenging to execute. Promoting and selling discount deals is a highly capital-intensive business, requiring a strong sales force and high marketing costs to acquire and retain both merchants and subscribers.

Given that Facebook is almost a pure technology background, it seems that Facebook is deciding to commit less to running a business model that heavily depends on employing sales reps and handling complaints. Facebook is notoriously hard to get a hold of on the phone for instance if you want to shut your account.

The decision also raises some serious questions over the long-term profitability of deal providers like Groupon whose financials clearly show a trend of rising expenses. [2] Groupon has spent over $800 million in marketing and administrative expenses in the first half of 2011, which is roughly 55% of its revenues, and the ultimate operating leverage associated with this business model remains unclear

Daily Deal Businesses: The Promises and the (Operational) Anguish

Posted in Collective Buying by Manas Ganguly on June 22, 2011

Continued from earlier post: Is the GroupOn model sustainable?

The stats are telling: Kunal Bahl and Rohit Bansal, founders of Snapdeal.com which is barely an year old already have 5 million subscribers as on June 2011. They are targetting Rs100 crore in revenues in 2011 and plan on making Rs300 crore in 2012.Kunal aims at Rs.500 crore by 2014.

Snapdeal, a poster boy for the runaway success of daily-deal websites, gets local merchants to offer “deep discounts” on products and services to the value-conscious Indian consumers. For merchants, this offers an affordable route to promote brand and an easy way to sell the so-called ‘distress-inventory’ — such as empty seats on a last-minute flight.

Snapdeal, a poster boy for the runaway success of daily-deal websites, gets local merchants to offer “deep discounts” on products and services to the value-conscious Indian consumers. For merchants, this offers an affordable route to promote brand and an easy way to sell the so-called ‘distress-inventory’ — such as empty seats on a last-minute flight.While there is little doubt about degree of initial success, questions remain about the long-term sustainability of the underlying business model of websites like Snapdeal, modelled after Groupon, which pioneered the concept in US.

To understand the efficacy of the Daily deals business models, one must study the US markets where Google, GroupOn, Facebook and LivingSocial have been working at businesses and consumers on this model.
Rocky Agarwal, a US based local products specialist recounts the story of Jessie Burke saying that “running a Groupon was the single worst decision I have ever made as a business owner thus far”. Rocky has offered the following reasons to the unsutainability of the Groupon/Daily Deal model:

1.There is very little information on which merchants can make decisions
2.Tracking (of Coupons) and infrastructure is really getting to be a difficult problem
scheduling of deals are based on factors that optimize the deal for Groupon, not the merchant. Thus traffic walkins could be unmanageable at the merchant’s end at a point of time when they leats require it.
3.Daily customers are really deal hunters as against being loyalists. Thus the traffic keeps moving around.
4.Merchants make money when customers buy more and not just limit themselves to deal value. If customers only use deal values, the ability to cross sell to higher footfall traffic dies. This is an opportunity for the merchant to make higher margins on related products. However, daily deal customers seldom move beyond the deal value.
5.Operational glitches like lack of training.
6.All these mount upto customer dissatisfaction which is pernicious to the initial cause of taking the business to a wider cross section of people

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