Where Einstein Meets Edison

What’s the Big Deal?

What’s the Big Deal?

May 13, 2010

Subscribe to Yipit and Find Out.

Deal aggregation sites, such as the four-month old Yipit, are poised to democratize the young and rapidly expanding daily deal industry. Daily deals, 50%+ discounts on local goods and services negotiated by third party websites and e-mailed to subscribers each morning, have exploded in popularity over the last year and half. In fact, nearly 5 million Americans now wake up to a deal featuring a local small business in their inbox1,2. Of these, 3.7 million subscribe to the industry leader: Groupon1.

Founded in November 2008, Groupon reached profitability in just six months and was valued at $250 million in a Series B round of $30 million this past December3,4. It is on track to earn $100 million in revenue in 2010 and is pursuing a strategy of rapid expansion4,5. Groupon’s whirlwind success is due to its surprisingly simple business model. Groupon provides targeted, quantitatively measurable marketing for small businesses in the form of deeply discounted coupons e-mailed to an extensive subscriber list and takes a significant cut of the revenue from each coupon sold. While Groupon currently dominates the daily deal market, its success has spawned nearly 70 competitors in the past year including LivingSocial, a Facebook application developer turned deal provider, who received $25 million in Series B funding this March to compete with Groupon 2,6. Despite the initial success of this business model, Groupon, LivingSocial, and other daily deal providers are unlikely to continue capturing significant value because the market for daily deals is moving toward one of (nearly) perfect competition.

The market for daily deals already exhibits many characteristics of a pseudo-perfectly competitive market including very low barriers to entry, numerous producers and consumers, homogenous products, and firms that aim to maximize profits. While this last characteristic is found in most markets, few also exhibit three out of the five other characteristics found in perfect competition. The only barriers to starting a daily deal business are setting up a host website and making advertizing deals with small businesses. As the technology required to set up one of these websites is trivial and small businesses are banging down the doors of daily deal sites to get featured -Groupon self-reports that 97% of featured businesses would like to be featured again -the barriers to entry are negligible7. The number of new entrants, and the rate at which they are entering, is not only a testament to the low barriers of entry but also demonstrates that there are many firms willing and able to supply daily deals. Combined with a rapidly growing consumer base of approximately 5 million Americans, the market for daily deals clearly meets the requirement of having countless providers and consumers. Furthermore, daily deals are homogenous products from a consumer perspective because a deal’s intrinsic value is the same regardless of the provider. However, from the perspective of a small business, the value of a deal is directly related to the number and demographic of the provider’s subscribers, as those parameters will determine how many deals are purchased and in turn how many new customers are acquired. Providers are able to compete based on their subscriber list, because the daily deal market does not yet exhibit the final two characteristics of perfect competition: costless transactions and perfect information.

Leaders in the daily deal market, such as Groupon, are currently able to capitalize on these inefficiencies to maintain their competitive advantage. While subscribing to a daily deal provider may seem costless at first, receiving an e-mail from that provider every day and evaluating the enclosed deal can become bothersome over time. This is especially true given that the average daily deal subscriber has only purchased one deal from their provider to date1. As such, consumers are often unwilling to subscribe to multiple providers because the number of e-mails they would receive per purchase quickly becomes unreasonable as the number of providers increases. This in turn gives sites likely to attract first-time users, such as Groupon, an advantage. Furthermore, it is very difficult for emerging daily deal providers to effectively market themselves, even if they offer better deals than Groupon, because consumers put minimal time and energy into their initial choice of provider. After all, signing up is “free.” This lack of perfect information combined with the implicit cost of subscribing to multiple sites allows well-known firms to maintain their competitive advantage. But not for long.

By scouring the internet for all available local deals and then sending subscribers only the ones that interest them, Yipit mitigates the cost of subscribing to multiple providers while ensuring that consumers have access to the best available deals. Unlike traditional daily deal sites that send all of their subscribers the same deal day after day regardless of their interests, Yipit allows subscribers to select the types of deals they would like to receive and then aggregates deals of the selected types from each traditional deal site into a single e-mail. In addition, Yipit users can choose whether to receive this e-mail daily, twice a week, or once a week, further customizing the “daily” deal experience.

Widespread usage of Yipit would negate Groupon’s, or any other daily deal provider’s, competitive advantage because their proprietary subscriber list would become meaningless. In turn, small businesses would be unwilling to continue letting daily deal providers take such substantial portions of the revenue from their already unbelievably priced coupons. In essence, the daily deal market would approximate perfect competition, allowing small businesses and consumers to extract the majority of the value from this new marketing phenomenon. Additionally, there is no reason to assume that Yipit or a competing aggregator would not be able to woo current daily deal subscribers. Subscribing to Yipit while automatically marking direct e-mails from Groupon, LivingSocial, and the like as junk would give a consumer more information about deals that might interest him or her while filtering out those that do not at no additional cost. Therefore as consumers begin to become aware of Yipit and other deal aggregation sites, the daily deal market will begin to resemble one of perfect competition, with many indistinguishable firms making similar profits.

Since the concept of deal aggregation is not new, as Kayak’s success demonstrates, it is important to understand why another firm did not preempt Yipit’s entrance into the daily deal aggregation space. Put simply, the ecosystem of daily deal providers and in turn the number of unique deals per day was simply not large enough to support an aggregator until several months ago. While there were numerous group-buying sites that aimed to produce similar deals during the dotcom boom of the late 1990s, the majority of them failed in 20018,9. However, this business model took off in China in the mid 2000s, with a twist.

Tuangou, or team buying, is China’s answer to the failed American model. In action, tuangou consists of up to hundreds of consumers mobbing an unsuspecting retail establishment to negotiate a group discount on a single item. The day, time, and item are established online either through informal chat rooms or sites dedicated to facilitating tuanguo. Such sites have become incredibly successful, and it’s no surprise given that bargaining is so deeply engrained in Chinese culture. While the tuangou model failed in the United States, as we are not accustomed to approaching retailers and demanding discounts, it arguably re-ignited the idea of group-buying and led to the recent emergence of daily deals.

While the original group-buying sites and China’s tuangou phenomenon are fundamentally consumer-focused, the true value in the current daily deal craze is actually an innovation in marketing for small businesses. As previously mentioned, daily deals are one of the first marketing mechanisms small businesses have been able to use that allow them to analyze the results their efforts quantitatively in real time. However, several other competing paradigms are emerging that also provide small businesses with quantitative real-time data on marketing efficiency. One example is Analog Analytics, which hosts a platform for online publications to feature traditional coupons, such as two for one deals, created by local small businesses. Such coupons offer much more control for small businesses than daily deals do because they allow the businesses to determine the length of time the coupon runs, and therefore the implicit number given away, as well as maintain non-trivial margins when those coupons are used. Although no daily deal aggregation service currently incorporates the coupons hosted by Analog Analytics, one could easily see how the daily deal aggregation model could be adapted to include these coupons and many other potential direct online marketing initiatives. In fact, the true value of aggregation sites like Yipit is their flexibility.

As the number of daily deals and frequency of other direct marketing tools continues to increase, Yipit is preparing itself for the future by creating an application programming interface (API). Yipit’s API will allow developers to create services that interact with Yipit’s platform using lists of deals at specific businesses or around latitude and longitude coordinates. In fact, Yipit’s co-founder Vin Vacanti envisions a future in which Yipit includes an algorithm that recommends deals to subscribers based on their revealed preferences, i.e., purchases, as well as their explicit preferences6. Using subscribers’ click-through histories from Yipit’s site and e-mails, or potentially teaming up with Foursquare to leverage significant location-based consumer data, Yipit could learn that a certain subscriber actually prefers restaurants to yoga, despite his or her preference settings. This would not only provide more value to subscribers, as Yipit would cater to them rather than their self-images, but would bring significant additional value to small businesses offering daily deals by further distilling their target audience. In addition, this could allow Yipit’s recommendations to adjust as subscriber’s spending habits change. Since consumers do not always notice, or want to notice, changes in their spending habits, they are unlikely to go back and reset their preferences on Yipit. This has turned out to be one of the major shortcomings to advertising on Facebook, as people’s “likes and interests” are often outdated. Regardless of Yipit’s future plans, consumers today would benefit from subscribing to Yipit and blocking direct e-mails from traditional daily deal providers. After all, Yipit finds the best deal for you.


References

  1. “The Groupon Stats,” Groupon Works For Businesses: Home, http://www.grouponworks.com/. Accessed April 12, 2010.
  2. “Social Commerce Leader LivingSocial Raises $25 Million Series B Round, led by U.S. Venture Partners,” LivingSocial: Press Room, Mar. 11, 2010. http://livingsocial.com/press/living_social_raises_25_million.
  3. “Groupon Raises $30 Million Round Led by Accel Partners with NEA to Support Rapid Growth of Social Commerce,” Business Wire, Dec. 2, 2009. http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20091202005210&newsLang=en.
  4. “Groupon Gets A Hefty $30 Million From Accel For Local Offers Service,” Michael Arrington, TechCrunch, Dec. 2, 2009. http://techcrunch.com/2009/12/02/groupon-gets-a-hefty-30-million-from-accel-for-local-offers-service/.
  5. “Total Dollars Saved,” Groupon: Home, http://www.groupon.com/. Accessed Apr. 12, 2010.
  6. Vin Vicanti, in discussion with the author, April 5, 2010.
  7. “What Businesses Say About Groupon” Groupon Works For Businesses: Why Groupon?, http://www.grouponworks.com/why-groupon. Accessed April 12, 2010.
  8. “Group-buying site Mercata to shut its doors,” Greg Sandoval and Dawn Kawamoto, CNET News, Jan. 4, 2001. http://news.cnet.com/2100-1017-250529.html.
  9. Laurie J. Flynn, “MobShop, a Group-Buying Site, Drops Its Consumer Business,” New York Times, January 15, 2001.

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