The battle among social network daily deal providers

Citation

(2011), "The battle among social network daily deal providers", Journal of Consumer Marketing, Vol. 28 No. 3. https://doi.org/10.1108/jcm.2011.07728cag.001

The battle among social network daily deal providers

Article Type: Internet currency From: Journal of Consumer Marketing, Volume 28, Issue 3

Edited by Dennis A. Pitta University of Baltimore

A previous column detailed the wisdom in product design of the Groupon online couponing service. From the consumer’s point-of-view, Groupon offers a deal every day with a catch. The catch is that enough people have to buy the deal before it becomes official. That catch has a certain amount of genius built into it. Groupon exploits the strengths of social media to promote deals at miniscule cost while tapping into peer pressure. Consumers who spot the Groupon daily coupon early before enough have been sold to make the deal official, can use social media to reach their friends and inform them of the deal’s value. That communication can broaden the number of people who know about the deal and exert enough peer pressure on them to buy and help surpass the minimum number sold threshold.

The Groupons can be addictive. They typically offer discounts of 50 percent on products and services of interest to consumers and help promote the providers. The old adage that, nothing is as powerful a motivator to prompt a consumer to visit a new store than a free hot dog, may be a bit too specific. However, Groupon’s success seems to be evidence that its discounts are effective motivators. The company’s success has also grown by expansion. Groupon fueled international growth by securing $135 million in investment capital in July 2010 (Reuters, 2010). That has allowed expansion by buying local companies in a variety of countries. They include CityDeal in Europe and ClubeUrbano in Brazil, and ClanDescuento in Chile (Wauters, 2010). Even the flat global economy has helped the company: consumers are more interested in saving money than they were just a few years ago.

Groupon has created a new product category, “online daily deals” with a new industry segment, “online daily deal providers.” Its success has spawned a host of followers including LivingSocial.com, buywithme.com, Woot.com, EverSave.com and others. Assessing market share involves a specific measurement. The metric used to gauge size is the “unique visitor” (UV). The industry is growing dramatically. From August 2009 to August 2010, the number of unique visitors has increased over 600 percent. Groupon is clearly the largest competitor. At the end of 2010, it had nearly 8.3 million UV’s compared to rival LivingSocial’s 6.9 million. EverSave came in third with 4.8 million UV’s (Web Analytics World, n.d.).

Benefits to consumers and retailers

The online coupon providers offer what is supposed to be a win-win deal to both consumers and retailers. Retailers seeking to build traffic or introduce a new location can drive business with carefully crafted online coupons. Consumers have a clear choice: they can pay roughly 50 percent of the stated value for a product or service. Groupon’s offerings provide a good illustration of the value proposition. A typical US offer is $30 worth of food and drink at a local restaurant for a payment of $15. In the UK, a similar Groupon for Bradford offered “Enjoy Four Tapas Dishes for Two Plus a Drink Each for £9 at Distrikt (Value £24)” (Groupon UK Bradford, daily deal, February 2, 2011). The deals are clearly described as well as the terms of sale. Consumers can enjoy steep discounts. In addition, consumers are exposed to previously unknown local retailers that may offer products and services of interest.

Retailers face a different calculus. They must be willing to offer at least 50 percent discounts minus credit card fees, which at first glance may seem to be oppressive. Typically, they limit the upper end of the deal to avoid hurting their profits too much while still offering an attractive package. In fact, they save promotion expenses they might incur using traditional media. Retailers also may create loyal customers whose lifetime value is significant and well worth the initial discount. Moreover, there is the possibility that Groupon using consumers may buy more during their visit. For example, restaurant meals might involve additional drink purchases which add to the retailer’s profit. The hope is that the incremental spending will boost the bill past the breakeven point.

Retailers need to be careful in embracing online daily coupons. The redemption rate for one provider approximates 80 percent (Purewal, 2010). Non-users do not cost the retailers anything. They boost Groupon’s revenue but not the retailers. The key metric may be that the number of repeat purchasers. Of the deal users, 22 percent repeat their purchase at least once (Wall Street Journal, 2010). The danger is that if a specific offer attracts “cherry pickers,” those deal prone brand disloyal customers, the retailer will suffer. The problem is worse when identical outlets exist in proximity to each other. Franchise retailers which are essentially identical will suffer if one offers a steep discount. Like the operation of perfect competition, consumers will flock to the low price provider at the expense of the others. Differentiation is important to using online deals successfully.

Benefits to the online daily deals providers

The primary benefit the providers enjoy is cash. The price to a retailer is the amount of the discount. What happens to that discount? Typically, the provider gets all or most of the money it collects from consumers when they purchase. The coupon/discount payments represent more than a flow of income. In the introductory and rapid growth stages of this product category, the flow is a flood. In 2010, Groupon expected to do $400 million in revenue and calculated that about 13 million people have registered to receive the company’s emails (Wall Street Journal, 2010). That cash and number of consumers have allowed Groupon, the largest provider, to expand globally.

Competition, innovation and the effects on daily deals providers

The lucrative economics that the first daily deal providers enjoyed have spawned a level of competition that is likely to put downward pressure on prices. If it does, retailers may have a bit more breathing space. Some retailers have already learned lessons by analyzing results and modifying their offers or switching providers. They have learned which offers attract one time purchasers and which might attract repeat customers. They have run the numbers and can assess which provider offers the best value. Providers will have to change to respond to the insights of their retail customers.

Implications for marketers

From one perspective, the online daily deal innovation seems to be just one more development in marketing practice. The ever-present need for differentiation and continued service development applies to this product category. However, ongoing success for daily deal providers will involve more than tweaking what they already do.

In fact, there appears to be room for further refinement that may increase the degree of differentiation and chances for continued success. All of the providers mentioned above lack one element that will be vital for sustainability: an accurate and extensive database of users whose preferences can be stored, updated and analyzed. It is true that the existing companies have the capability to build their knowledge base after they attract a consumer who purchases. However, they lack a pre-existing database of customers containing information that can be used to structure specific offerings.

Facebook has that database. The company has already investigated launching its own promotional effort that featured sending ads to Facebook friends of friends (Fowler, 2011). If a company like Facebook or Google with more extensive information about users could merge with or acquire a daily deal provider, the results could be remarkable. With essentially free media costs, the ability to automate tailoring an offer to specific customers, the results could be spectacular. As Facebook’s friend of friends trial demonstrates, the industry players are well aware of the opportunity. One wonders how long it will be before one or more acts?

In our next issue, we will investigate other informative sites and invite readers to submit their favorite internet sites for our consideration.