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The group buying collapse is coming

Group buying. Daily deals. Social commerce. Call it what you will, but the sheer number of blatant knock-offs that have sprung up in global markets following the “success” of Groupon and LivingSocial should give you a hint that all is not well.

A fair number of these startups are nothing more than two or three people, a few laptops, an internet connection and phone line. They’re strangely reminiscent of those outfits that sold small businesses those five-page microsites a decade ago. Small businesses got ripped off with websites based on cookie-cutter templates. Users/customers got ripped off because they actually couldn’t find what they were looking for.

Simply put, the problem with group buying sites is the model.

For example, a good or service worth US$28 is sold on promotion. The daily deal/group buying site drives a hard bargain and wants a 40-60 percent discount on that price. This means the business ends up providing that good/service for, say, half price. The deal site wants its margin too — around 25 percent. This can be dressed up and labelled as almost anything. They’re putting buyers in touch with sellers. This means that for something with a normal retail price of US$30 will net the business just US$7.

  • Retail price – US$28
  • Discount – US$14 (= US$14 deal price)
  • Payment to business – US$7
  • Deal site service fee – US$7

Imagine taking a 75 percent (or even 60 percent) knock on every item you sell in a deal. Even after taking into account mark-up, it simply doesn’t make sense.

A deeply discounted deal is not sustainable, not for the business providing the deal. When these willing businesses dry up, so too will the daily deal sites.

This doesn’t even take into account potential fraud or the payment issues. That’s on the business side of things.

For users, these sites have become nothing but aggressive email address harvesters. Some won’t even let you see a deal before registering with your email account. The more email addresses they have, the more attractive they’ll be to businesses who are thinking of offering a deal. Plus, they need to keep their user bases growing to make sure that email open rates, clickthrough rates and conversion rates remain favourable.

Daily deal sites are spending unbelievable amounts of money to acquire users. Some of the larger deal sites in emerging economies are spending tens of millions of dollars a year on Google AdWords.

The relentless pursuit of growing subscribers (and potential businesses to “sell” a deal to) explains why the bigger sites are expanding to questionable markets in small, out of the way, towns.

Some of the emerging market operators, however, have hit the jackpot. Two pertinent examples of companies which have done so come out of South Africa. Groupon purchased Twangoo in January and UbuntuDeal was bought by auction site bidorbuy in April.

Media outlets are getting in on the action too. Press titan Avusa has launched Zappon, advertising its “access to 2 million readers”. Naspers has launched Dealify through its MIH Internet Africa division, after the media giant was beaten to Twangoo by Groupon.

Oh yes, and Facebook Deals and Google Offers have turned their sights to other international markets.

One or two more owners of the existing sites may yet hit pay dirt, but it remains an incredibly splintered market.

Add in the fast-diminishing base of businesses who are willing to discount goods and services and you suddenly realise why nearly every single one of these daily deal sites is littered with beauty spa treatments, dance classes and weekends away at non-descript lodges in places you’ve never heard of.

Author | Hilton Tarrant: Columnist

Hilton Tarrant: Columnist
Hilton Tarrant is production editor at Moneyweb. His main focus is project management for the listed company’s local and international websites, and contributes to their strategic direction. From time-to-time, he also fills in for Alec Hogg on the SAfm Market Update with Moneyweb radio programme. In between, he covers... More
  • There are better way to harvest emails :)

  • There are better way to harvest emails :)

  • Dee Chetty

    As a small business owner who has used these platforms recently, I agree with you. The deal does not make financial sense to any business owner unless the profit mark up is 300% and more. 

    My approach to the matter was slightly different than just to acquire customers from the deal alone. I looked at the deal as an advertising cost and a traffic generator. Even if no-one buys the deal, it ends up in the subject line of 100’s of 1000’s of inboxes. Which, as a small business, is not easy to achieve cheaply on its own. 

    Subsidizing the deal comes at a high cost for a low revenue small business, but the spin off interest that it generates is enough to justify doing the deal again. 

    I guess now it is a matter of timing as to when to advertise on these platforms to get in before people develop ad-blindness toward the daily mailers and the business model starts cracking under pressure.

  • “A deeply discounted deal is not sustainable, not for the business providing the deal” 
    It’s not supposed to be sustainable for one business, it’s supposed to be the up and coming businesses 15minutes of fame, and smaller businesses are willing to give that discount and write it off to marketing… Will that list of businesses ever dry up? It might get smaller, and less relevant to inner city dwellers, sure, but I doubt it will dry up completely.
    The bigger issue is definitely the noise to signal ratio with all of the competitors in the market, but name one market where competition was bad for the consumer?

  • The reality is its more “discounting” than “group buying”. For instance most deals have an upper limit (as opposed to minimum threshold). 

    Sooner or later someone is going to realise that the 50% discount norm is ridiculous, and will start offering a variety of well priced deals. It will move from discounts to the curation of good offers on everyday goods.

  • As an occasional Twangoo/ Groupon (MyCityDeal) user, I think that even the additional traffic value (as in hoping for new clients to become returning clients, build up a loyalty, clients who don’t wait for the next deal for a specific venue but also purchase at retail price) is not worth the loss in revenue when signing a Groupon etc deal as a business owner. There might be some additional value spin offs if post communication is done properly by the business, i.e. send email newsletters or SMS deals straight to the new clients which were referred by Groupon etc., but that type of client initially established a relationship with Groupon, and not the business, this type is looking for a cheap group deal, so they are unlikely to pay retail price. Often, those purchases are not made based on an immediate need, but as a treat, so they mindset that buyers are in is not compatible with gaining them as future retail clients. – Barbara Ulmi.

  • Erik

    I agree the deals don’t make sense for selling commodities. However it is good value compared to paid for advertising when attracting long term customers. Throw in the fact that one only pays for results, it is less risky that traditional advertising, where the costs are paid up front for uncertain return. I calculated a positive NPV on my dance studios last campaign. If you are however too greedy, and don’t have an upper limit in line with your businesses increasing costs to scale, then you can get burnt having to service the vastly discounted deals., especially when this affects value of service to normal full price customers.

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  • Monstar449

    This is exactly the point of these sites.  Daily Deals are not going to bring you revenue.  Think of them as a very inexpensive form of both social advertising and word of mouth.  Businesses with high variable costs struggle with these deals, but those with low variable cost do very well.

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