Final Project: Are group-buying sites in trouble? Maybe it’s time to turn to the Long Tail for help

Who doesn’t like a good deal? That’s right, everybody does and with the internet’s ability to connect people and businesses in ways never imagined before getting the best deal became a lot easier thanks to the power of the community.  Group buying sites (or social-buying sites, as they are otherwise known) are the perfect example of how the internet’s ability to quickly connect people into make-shift communities has changed the way shoppers and businesses interact. Traditionally (in very crude terms, without getting too much into the laws of supply and demand) businesses are the ones that get to set the rules of the game when it comes to setting the price for their products of service; so as much as we - the consumers – would like to snag something we want at a lower price, for the most part we have to chose between buying the said goods/services at the offered price or searching for a better deal elsewhere (which can be very time-consuming). From the business’ standpoint offering a discount or deal on a product/service only makes sense if either a) the overall increase in sales from the deal is large enough to off-set the money lost from offering the discount and/or b) the deal attracts enough new customers (which presumably will then become regulars) to justify the expense. Now if only enough of us, consumers, could organize to make it worthwhile for a business to offer us a discount on a product/service we want… wouldn’t that be a win-win for everyone?

With all likelihood very similar thoughts were going through Andrew Mason’s head somewhere around the later part of 2008; the ultimate culmination of this productive thought process was the creation of the infamous Groupon.com, currently the top deal-of-the-day site in the marketplace. The concept is fairly simple: shoppers join Groupon.com and gain access to highly discounted deals ever day, when they find a deal that interests them they sign up, wait for the number of people who want the same deal reach a required threshold (or they can try to persuade their friends to join), then get a cut-rate dinner, haircut, yoga class or other product/service. What Groupon did is effectively harness the power of the internet to allow people with similar interests/goals/objectives to quickly bind themselves together, thus awarding each individual the opportunity to benefit from the collective bargaining power of the group. The concept seems to be a win-win for everyone involved: businesses get a short-term boost that ideally leads to more long-term relationships, consumers get the products/services they want at a highly discounted price and the Groupon gets a cut of the promotions they run. With such a winning proposition it’s really of no surprise that concept took off like Discovery on a launch day. According to the data from Compete.com within the past 12 months traffic to Groupon’s websites has grown from an already impressive 2.5M Unique visitors in March 2010 to an astonishing 22.5M in March 2011 (that’s about 8x growth in traffic).

Traffic to Groupon.com over the past 12 months (source: Compete.com)

 

 It is not surprising that Groupon’s huge success gave rise to a number of copy cats; over the past couple of years the number of the deal sites has increased dramatically: LivingSocial, RueLaLa, Gilt, BuyWithMe, CoupTessa are just a few examples of this trend.

The very concept of group-buying is ingeniously simple and thus fascinating; it brings together the social networking and the bargaining power of the groundswell. Most “deal of the day” sites encourage buyers to announce their recent purchases to friends/social networks via a referral link; moreover they encourage shoppers to actively involve friends/family into the process, which in turn leads to more deals being sold increasing the likelihood that shoppers get the service/product they want at a great price and businesses get to sell more services and hopefully have those that purchased the deal come back in the future. The group-buying sites also actively encourage collective bargaining; for example at Groupon, for each new friend that signs up and buys a deal you’ll get a $10 referral bonus and at LivingSocial, the deal might even end up being free for you if you recruit enough people to join
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On the surface group-buying sites appear to be flourishing. Amazon recently invested $175Mil. in LivingSocial, Gilt.com is reportedly shopping for an IPO and Groupon had enough faith in its business model to turn down a $6Bil acquisition offer from Google.  However, despite the seemingly successful business model and the ever-increasing interest from the big players in the business space group-buying sites have recently hit a few bumps on the road. When researching the topic I couldn’t help but notice that there seems to be an increasingly high number of blog posts/news articles that put the long-term success of deal-of-the-day sites. Only a couple of weeks ago CNN Money ran an article that argued that the days might be numbered for deal-of-the-day sites (or most of them at least). Further on, more and more grumblings (from both small businesses and consumers) have recently been heard the online community and the blogosphere. Let’s take a closer look at those concerns:

1)   No barrier to entry and resulting over-crowding

While Groupon still remains the clear leader among group-buying sites it is starting to face an increasingly tough competition from rivals like LivingSocial, RueLaLa and more recently Facebook. Moreover, it seems that every day more deal-of-the-day sites pop up <Pandora has been tirelessly running ads for CoupTessa for me over the past couple of weeks>

New group-buying sites seem to be popping up every other day (source: Aniya's Pandora)

 

Since currently there is little barrier to entry for new “deal” sites it is easy for new players to enter the marketplace. Further on, there is very little differentiation between various group-buying sites; Groupon, LivingSocial, Going etc. all largely sell the same types of deals to more or less the same group of people. As a result the overall quality of deals is likely to decline because a finite number of good offers local business can put forward is being spread thinner and thinner across the ever-expanding competitive set.

2)  “Great deal” fatigue

As an inevitable consequence of the previous point the initial thrill of deal sites might be wearing off.  In the CNN Money story I mentioned above consumers complained about inboxes being flooded with dozens of deals making it increasingly hard to separate the good ones from the “not worth it”s and even causing some to unsubscribe all together. The following comment appears to reflect the prevailing sentiment

Similar user comments are popping up all over the blogosphere (source: iReport, CNN.com)

Moreover consumers increasingly express the so-called “Groupon gilt”, i.e. buying deals on impulse and then regretting it later on; a similar side effect are all the forgotten/expired Groupon deals which ultimately means consumer money wasted, leading to overall decrease is consumer satisfaction and decreased trust in the concept. One of the main reasons for this trend in my opinion is the fact at this point of time deal sites use the shot gun approach to the deals they feature. A large bulk of the deals currently seen on group-buying sites are targeted at a broad audience, which is ok in the beginning but once the novelty of it is gone it gets boring: I mean how many times can one be excited about getting $20 worth of food for $10 at a local eatery?

3)  Big business want “in” on the game (and as a result small folks start feeling like they are being left behind)

Big brands have discovered the opportunity in social commerce and are now looking to capitalize. This is why we started seeing more and more deals from retailers like Gap and Amazon on deal-of-the-day sites. Further on, as I’ve pointed out above, sites themselves face an increasingly tough competition within their space making it harder for them to attract deals from top-notch local businesses, which is why you might have been seeing a lot more deals from laser hair removal places than local restaurants. As big businesses start entering the game some of the smaller folks start feeling left out, which could potentially undermine the very concept of community-based deals that made Groupon-like sites so popular in the first place, making them little more than a glamorized online version of a Valpack.

So should Andrew Mason be worried? Mmm maybe… at the very least he should be looking at ways to keep Groupon relevant (which is not surprising given the ever-changing nature of the online market space). So what are some of the new directions deal-of-the-day sites might take? Personally I see a few possibilities:

·         

Turning to the Long Tail
 
Currently social networking is for the most part only gets involved insofar as friends referring friends to deals they find interesting. That’s great but at the same time somewhat limiting and involves a lot of legwork (forwarding the deal to friends who I think might be interested, connecting with those friends to see if they are, figuring out if I still want the deal if they aren’t etc etc.) One potential solution for this would be deal sites that focus on a narrow segment of the market (e.g. outdoor enthusiasts, fashionistas, globetrotters) and offer deals that are less likely to appeal to the broad population but more likely to spark significant interest among a smaller number of enthusiasts. In a way this is like applying the slightly altered version of the Long Tail concept. In a way this is currently applied rather successfully by Backcountry.com (an online retailer focusing on outdoor sports and activities gear). Backcountry.com’s business strategy focuses heavily on niche marketing; currently they operate four full retail, one closeout, and 5 one-deal-at-a-time (or ODAT) stores. Each store has its own name, logo and distinct look-and-feel

List of brands ran by Backcountry.com (source: the web)

Sure, their individual site traffic is dwarfed compared to giants like the Groupon but across 10 different online storefronts the numbers add up quite nicely for Backcountry.  

·     Personalized approach

Another way of dealing with the overcrowding in the deal space may be to offer deals are based on past history and/or consumer-specified preferences or demographic/psychographic profiles. Currently deal sites offer the same deals to everyone, Groupon even started to allow its users to browse all available deals in an attempt to make it easier for consumers to find something they might be interested in. However in my opinion the Paradox of Choice is the ultimate flaw in that approach. The concept that “more” is actually “less” was introduced by Barry Schwartz in his 2004 book The Paradox of Choice; as he points out, having too much choice actually increases consumers’ anxiety decreasing their likelihood to ultimately make the purchase and/or be content with it. This definitely sounds like what may be happening to group-buying sites: too many sites, too many deals = lost and frustrated consumers. However, I still do like getting good deals on things that I am actually interested in, so why not only show me the deals that are relevant? This idea seemed to have worked beautifully for Amazon with their Gold Box concept, so could the same approach for Groupon or LivingSocial?

·     LBS and deal-of-the-minute concept

Going on vacations to a specific city or country? Are in the neighborhood and looking for a good coffee shop or restaurant? Wish you knew if any of them have any special deals going on right.this.second?

To me this sounds like the ultimate proposition for the future for both LBS and deal sites. Sites like FourSquare and Gowalla have generated a lot of hype but are yet to find a more or less practical application (and figure out a way to monetize all that interest). Both apps tout themselves as ultimate “social guides”, making ones surroundings easier to use and more interesting to explore; however currently there appears to be little truth to those statements. Sure I can check in at my local Starbucks and <if I do it enough times> maybe even become the mayor but then what? So far all those check ins have earned me not much more than a shiny virtual badge and a proverbial pat on the head.  

However, I am not ready to give up on the concept all together. In my opinion there might be an opportunity here for deal sites and/or individual businesses to leverage the LBS concept to reach out to consumers with extremely time sensitive and location specific deals (e.g. 50% of your total bill at a nearby restaurant if you eat there in the next few hours). Obviously there are multiple logistical issues/questions that need to be resolved in order for this approach to work: how to make sure that the users are only exposed to the deals they are actually interested in? What’s the benefit/cost for LBS sites to partner with an existing deal site like Groupon vs. developing their own solution (which is what Facebook might be considering)?

·    Turning the concept of group-buying sites on its head

Currently the deal-of-the-day sites come to the consumer with the deals and the consumer decides if he/she is interested. What if the concept worked in reverse? Say I want to go to specific restaurant or want to get a deal on sky diving… no business is going to give me a discount just because I ask. But what if I could be a part of the platform that unites thousands of deal seekers like me some of whom are looking for the same exact thing I am? Now if it’s not just me anymore that’s asking for a certain deal but a few hundred or even thousand people businesses would likely be much more willing to negotiate. 

  

Summary:

In my opinion the concept of group-buying is not going to go away entirely but it’s definitely going to change. The toughest will survive but many of the small deal-of-the-day/group-buying sites that won’t be able to find a way to differentiate themselves from the rest are not going to make it. As for the bigger sites like RueLaLa and Groupon their survival would depend greatly on their ability to innovate and adjust to consumer needs. In my opinion greater personalization and more short-term highly-localized deals and more niche-focused sites is where this market is heading. At the same time group-buying sites should not abandon those who brought them where they are – i.e. the local businesses; rather they should create different, more innovative and mutually-beneficial ways to work together (potentially in part through LBS services). As for us – the consumers – fear not, will all likelihood the deal is here to stay!