The online group-buying model is turning out to be big business. In 2010, the most popular group-buying site, GroupOn.com, made USD$713 million in worldwide revenues and in 2011, revenues are estimated to be on the scale of USD$3-4 billion. In its recent IPO filing, GroupOn states that revenues grew by 22.7 times in 2010 with an estimated 83 million subscribers across 43 countries. Given that GroupOn is only two years old and already doing spectacularly well, it is estimated that its IPO will eclipse even that of Google’s (which was the record setter for a decade, until LinkedIn’s recent IPO).
The online group-buying model, in its most common implementation, puts up daily deals for interested users to buy. However, to qualify, a target of minimum number of buyers within a set period of time must be met. Interested buyers provide their credit card details upon registering their interest to purchase the deal but the actual financial transaction only takes place upon reaching the minimum targets, at which point the buyers are charged and provided with the details on how to make good on their purchase.
Effectively, the model provides an ability for retailers to tap into the online consumer market whilst simultaneously reducing their risk on quality discounts and sales promotions as the group-buying site provides an assurance contract for buyers and sellers of the deal. The group-buying site takes a cut of the deal generally at 50% or more of the total deal value. The popular deals tend to be lifestyle focused deals although the business model works well for a large class of deals.
Group buying is related, in a form, to social networking, and hence the following digression.
Social Networking vs. Social Sites
There is a distinction between a social networking site and a social site. The former focuses on using existing relationships established “offline” to rebuild online relationships, whereas the latter uses common overlapping interests as a base to build new online relationships. Social networking sites focus primarily on private messages, chat and comments as a form of interaction, whereas social sites focus on content as a primary form of interaction between members.
The phrase “stranger networking” succinctly describes the latter and many sites have provided capabilities for strangers to network based on common interests in travel and lifestyle. Examples include CouchSurfing, Yelp, reddit etc. As such, a lifestyle social site requires two main focus areas:
- providing a content platform for members to share lifestyle related content
- providing a social commerce platform for members to buy (and sell) lifestyle products
Content Platforms
Content and review platforms have primarily used advertisement driven business models. Yelp is an excellent example of an advertisement driven lifestyle social site. Their tagline emphasizes finding great local businesses but the actual user contributed site content is far more extensive than one would imagine from their tagline. There is great coverage and exposure on every aspect of lifestyle related services and products. The extensive content drives visitors to Yelp, which drives the Unique Visitor (UV) metric, which in turn drives their ad sales. In 2010, Yelp is expected to report a revenue of USD 50 million from ad sales.
Blogging and discussion sites, on the other hand, have used the freemium business models. Examples are numerous, from reddit.com (a social discussion site) to Slashdot (the eponymous technology site) to hosted WordPress service.
Both business models have proved to work well, as long as UV and visitor retention rates remain high. As such, these business model don’t offer explicit unique selling propositions to the user but instead depend on brand loyalty, high quality content and a high degree of user interaction to remain profitable.
Commerce Platforms
Content and reviews are only one part of the equation when it comes to building lifestyle social sites. The second part of the equation is in providing a mechanism for users to buy and sell lifestyle related products. This is an area many existing social sites have failed to leverage as a business opportunity until fairly recently, when the GroupOn-flavoured group-buying business model proved to be successful.
Whilst group-buying models are not new, the genius of GroupOn’s business model was in extending the idea of “stranger networking” to its logical extreme and marrying it with existing group-buying models. GroupOn realized early on that the Internet allowed for anonymity in group-buying and structured the online group-buying model in that manner – everybody who signs up to GroupOn immediately qualifies for the deals and deal buyers remain complete strangers to each. As such, the limits of group-buying power leveraged in the real world did not exist in the GroupOn model.
In addition, by doing away with the complexity of social networking and focusing on stranger networking in its strictest sense, GroupOn allowed users the freedom to group together and buy deals purely anonymously and to the mutual satisfaction of each and every group member as well as the deal seller.
GroupOn entered the social fray quietly and grew at an unprecedented rate, establishing its dominance before anybody realized its impact on the online retail space. They have become the dominant player and have been extending their reach worldwide by buying up local operations.
Local Flavours
In Malaysia, consumers have responded positively to the introduction of local deal sites with an estimated 5,000 users signing up daily on local sites. GroupOn acquired Malaysian run Groupsmore which are expanding at a rapid rate of 3000 users per day and have sold close to 80,000 vouchers to deals with an estimated RM4 million in revenue thus far. In Singapore, GroupOn acquired Beeconomic.com. GroupOn is targeting for dominance in the South East Asian market by having local companies drive overall company strategies in the respective countries.
Another startup which has gained significant number of users is DealMates. It operates under the umbrella of the Catcha Group, is in its 4th month of operation, and has gained over 100,000 members. There are rumors that MOL is planning to launch its group-buying site.
Other then the larger sites, the smaller Malaysian players are estimated to number at 35 companies, each with an estimated 5,000 signed up users or less. As such, the current group-buying market is very fragmented as it is a nascent but rapidly developing market.
Global Flavours
Worldwide, the technology giants Facebook and Google have both realized the potential of group-buying and are leveraging their respective strengths in pushing into the market. Facebook is leveraging on its geolocation facility, Facebook Places, to drive location-based deals to its users. Facebook deals are currently available in Canada, France, Germany, Italy, Spain and the UK. There is little doubt that, in time, Facebook will use its social networking capability to further maximize deals sold within closed groups of friends, an opposite strategy that GroupOn has undertaken.
Google, on the other hand, does not have a strong social presence. It recently launched Google Offers in limited number of cities in the United States, and the exact mechanism behind Google Offers is not entirely certain at the moment. If one is to make a bet on their approach, it would be that they would put their world-class technical minds to work on the best algorithmic approach to optimize deal structure and pricing. Hence, with Google Offers, it may not be a case of the merchant setting the price and minimum targets, but Google’s algorithm setting the parameters for a deal. Depending on their implementation, they may actually win out because maximizing revenues from the deals is a classic algorithmic optimization problem, one that Google particularly excels at solving.
Opportunities
Current group-buying sites have generally focused on service and dining businesses. However, the group-buying model works well for many forms of deals – be it airline tickets, hotel rooms, computer gadgets, furniture and so on, so forth. Specifically, group buying in the area of leisure and travel have not received significant attention and as such, provide a growth area in the group-buying space as leisure travelers are always looking for great deals. Deals in leisure and travel include hotel rooms, on-ground tour packages, airline tickets, cruise tickets, entry tickets to tourists sites and places of interests and other such deals.
The savvy traveler in South East Asia looks for deals across the region, not just their country of residence. This means that travelers are looking for travel and on-ground package deals across South East Asia.
Targeted Deals
The current GroupOn targeting mechanism is weak as it does not differentiate between the interests of consumers. As such, offered deals tend to be of mass market interests and not sufficiently varied to be attractive to a larger market of consumers.
“Personalized deals” or “personalized coupons” can be tailor-made for consumers based on profile data collected through social networking profiles and thus provide the ability to deliver focused deals for consumers based on their interests. Furthermore, for repeat customers, buying patterns can be helped to tailor deals.
Secondly, most mobile platforms already understand geolocation and have the technology in place in delivering geo-targeted deals. Geo-targeted deals significantly increases deal conversion rates as the deals are not blindly sent to signed up users.
Refining the business model
There have been interesting takes on this model. Most interesting is the ability for anonymous groups of people to band together to get distributors, suppliers or retailers to provide them with better prices on specific items. If the distributor/supplier/retailer agrees to the price, the deal goes through. Again, the site facilitates payment and provides the buyers with full details on contacting their seller.
The key observation here is that the group-buying site does not get involved in the logistics of ensuring the item gets delivered, or handling refunds, or ensuring items meets the expectations of the buyer. Responsibility on ensuring the reputability of the seller belongs solely to the buyer, and in converse, the responsibility of ensuring the purchased items are correctly delivered or redeemed, belongs to the seller. The group-buying site only remains a financial and crowd sourcing facilitator.
And that’s the end of this round of a mental core dump