US Coupons IPO signals a return of the Online Deals mojo

RetailMeNot today submitted an S-1 filing as a precursor to a $230m float in the US, a clear indication of an upswing ahead for the beleaguered Online Deals market.

Some time back I talked about the diffusion of innovations curve, how deal-hungry consumers had adopted the burgeoning Deals market like a pack of clucky Brangelinas on Safari, driving the growth of the market place to breaking point. What followed was market disillusionment as the half-baked players fell short of their customers’ expectations time and time again. Now that the chaff has been swept away, or in some cases absorbed by the leaders the market is once again satisfying a powerful demand for online deals.

In Australia I expect the market to regain momentum toward a billion dollars in revenue, and $100m or so in EBIT. As a market the EBIT pool isn’t stellar, but given the winner-takes-most nature of the sector each of the 2-3 leaders will likely hold 20% of the market and share more than 80% of total profits, meaning $200m in revenues will yield ~$30m in EBIT, not bad.

Diversification in the Deals model is also apparent, with a clearer division between servicing a basic need versus impulse and discovery. The holiday category is growing with fully packaged vacations on offer turning long-haul travel into a $1,000 impulse purchase, and the utility categories such as wine and home-wares are solid. Ironically the original purpose of Group Buying, to fill every empty seat in your local restaurant, continues to miss the mark with offers appealing more to the price conscious than the culinaraly adventurous, disappointing proprietors and their staff alike.

Although no one has yet nailed the local restaurant marketplace, the prize is huge. I expect one of the leaders will emerge with a model that works and further accelerate the Australian Deals market to $1bn in revenues between now and 2016.

Spreets goes Hybrid in a desperate move that might just work.

Spreets recently announced their plan to include offers from competitors alongside their own, making spreets.com.au the first major player to launch a hybrid Group Buying/Super Affiliate offering in the Australian market.

I imagine the evolution of their model went something like this:

Early 2010: Spreets is formed and is among the very early entrants into the Australian marketplace, their model closely echoes the fast growing US originator, GroupOn.

Middle 2010: Spreets finds early success with a single deal each day, deals are sold at 40-50% revenue share to Spreets and consumers are excited about the new model, each offer sells many hundreds of vouchers, competition is light and shareholders are happy!

Late 2010: A number of new entrants intensify competition, including well-funded overseas players GroupOn and LivingSocial, local Catch group player Scoopon and of course Cudo who brought TV advertising to bear for the first time. Spreets immediately lose marketshare to these new upstarts, unsettling shareholders and peaking the interest of Yahoo!7, the natural rival of Cudo shareholder ninemsn. A second “side deal” is now commonplace on Group Buying sites, providing an alternative to the main offer of the day. Revenue shares of 35% are also now common as competition intensifies and daily deals businesses battle to win the best merchants.

Early 2011: Spreets is bought by Yahoo!7 for just over 22m, an incredible outcome for the Spreets’ co-founders and investors. Interestingly, a higher purchase price was touted ($40m) as the new owners congratulate themselves at having managed to jump on the fastest of bandwagons (myspace anyone?). The model has evolved to include 5 or more daily offers, vacation offers and longer running offers. Revenue shares of 30% are common.

Late 2011: Some 80 competitors exist in the market and Spreets market-share has flattened to 12-14%, products offers become frequent often at under 15% revenue share for the Group Buying business, customer discontent is at an all-time high due to shoddy product suppliers failing to deliver and 20+ daily offers are now common resembling a deal marketplace and requiring an increasingly large and expensive sales force to meet that demand.

2012: 2012 was make or break for many group buying businesses with a large percentage falling away in the second half of the year. Average revenue shares of 25% are typical and with 50+ daily offers on each of the larger group buying sites the average voucher sales per offer has declined significantly making it hard to fund the sales force required to meet the demands of a deal marketplace.

December 2012: Spreets calls it quits on the Group Buying model deciding to give the Hybrid model a go instead.

For many, the economics of a deal marketplace don’t stack up, which seems to be the case for Spreets. Meeting the demands of a marketplace without the overhead of a large sales force is possible though if competitor deals are surfaced alongside those deals originated in-house as a Hybrid affiliate/group buying business. Doing so can be profitable too, Affiliates are commonly paid 10% of gross revenue when a new customer is introduced, or almost half of the revenue retained by the group buying company, which is a good bounty given no sales effort, customer support or refunds and no exposure to shoddy merchants!

Assuming their Group Buying competitors sign up to having their offers surfaced on Spreets.com.au deal choice on the site will grow and no doubt customers will thank them for it. But what is the long term outlook for this Hybrid model?

Spreets customers will be absorbed by the competition over time, Spreets will already be losing 4-8% of Subscribers each month though natural churn and may not have the funds to replace them so a customer exodus to the competition will hurt greatly. The more successful the Hybrid model is at generating Affiliate fees the more quickly the exodus will occur and unless they can make their marketplace a great destination through the curation of compelling deal content and email targeting/personalisation they won’t come back either.

Alternatively this may be Spreets way of simply “milking the asset” until they close the doors on the business given this model will lead very quickly to some much needed profits, given their original investment it would be nice to see some return!

Click Frenzy, in spite of the massive failure it was an unprecedented success!

Sneeze and you may have missed it.

The Click Frenzy frenzy came and went in a matter of days, yet in that time it managed to reach the consciousness of some 20% of online Australians! That’s quite an achievement.

Their PR machine had triggered something in Australia’s uber-price-sensitive media which led to an incredible amount of coverage in the days leading up to the sale – it really did become a frenzy.

Even before the site ran into capacity issues on their woefully inadequate servers, their business model meant they would only ever make moderate returns. Choosing an all-up-front fixed-fee suggested they doubted the results they could yield for their retail partners preferring instead to cover their costs and hope for a modest return.

All in all, they clearly had no idea how ready the Australian market was for Click Frenzy!

Click Frenzy founder Grant Arnott explained in a rare and touching mia culpa that 300k visitors was their top traffic estimate, so the 1.6m visitors they actually saw blew their infrastructure wide open. To be fair, I think only a handful of sites around the world would cope gracefully with 1.6m concurrent users! The fact is the 7pm launch time was a big part of the problem, internet infrastructure hates concurrency!

Aside from the access issues suffered by many hundreds of thousands of bargain hungry shoppers, many found their way to the registered retailers and boy did they spend!

One retailer example I was shown paid less than $3,000 to participate but yielded over $80,000 in sales. An equivalent Group Buying offer would have cost the business $24 – 30k in commissions! A pretty good outcome for the retailer!

The chart below from Quantium shows the direct impact on participating retailers versus non-participating retailers.

160 retailers of varying sizes participated, and Click Frenzy probably netted an average of 3 – 5k upfront from each, meaning 480 – 800k in Gross Revenue. Not bad, however had they chosen to take a booking fee plus a moderate trailing commission, they would have netted anywhere from $800k ($1k upfront, 5% commission on $80k Average) to $2.4m ($1k upfront, 15% commission on $100k average)!

All credit is due to the Click Frenzy team, they were swept along by a frenzy of their own making albeit they we flattened in the stampede. Better luck next year.

Group Buying fortunes on the up?

After bottoming out during the past few months, the fortunes of some Group Buying businesses seem to be on the up, albeit a significant number have collapsed or been acquired in the past six months and the outlook remains grave for many more!

The fact that the sector’s nose is slightly up is in part due to the weeding out of weaker and often less scrupulous competitors who often served only to undermine the reputation of the sector as a whole.

In fact out of the 50 largest Group Buying businesses assessed in April, only 29 remain intact just 6 months on. And given only 10% (5) of those businesses were acquired that supports the view that smaller Group Buying businesses are of limited real value. In such a crowded and undifferentiated market lifesaving investment is tricky too given a lack of brand equity, good will or asset strength (off the shelf web sites are common and subscriber base overlap with top-tier competitors is often well over 70%) resulting in the collapse of underperforming and debt laden Group Buying businesses.

A quick browse through the sites of the 29 still standing uncovered indicators of pending doom for some.

Here are the choking canaries of the Group Buying world:

  • A high degree of niche product deals, such as robotic vacuum cleaners or iPad accessories
  • No sign of “number purchased”, an essential component of Group Buying that is quickly discarded when numbers are low
  • Extended Deal deadlines, this industry was founded on deal a day for good reason!
  • A smorgasbord of deals on one page, suggesting desperate recycling of old offers

Group Buying remains a $1bn future industry in Australia, regardless if that industry seemed to lose its way and stall when it was only half way there. Regaining lost momentum will be down to the leading players showing the way once again with a combination of brilliant marketing and a commitment to helping consumers discover great business products.

The strongest already have their playbook (Living Social, Cudo and Ourdeal) and will extend their positions in the coming 6 months through a focus on back-to-basics Group Buying offers like quality restaurants, high value vacation offers and utility products such as Cudo’s Meat Merchant.

Although I suspect another 15 from April’s top 50 will be gone by April 2013, leaving only a dozen or so standing, I think I already know who they are, I wonder if they do?

Is your business suffering a Group Buying Hangover?

Group Buying helped good businesses access revenues that had previously eluded them, improving utilisation, buoying their P&L and promising a sustainable new revenue stream from this exciting new consumer channel.

But now that the sector has waned and desperate Group Buying businesses have become fixated on stack ‘em high sell ‘em low product chuff – those once buoyed businesses are left feeling a little queasy.

Just one of the problems they face stems from prepayment, one of the headline benefits touted by most group buying companies (including me).

Although quick access to cash is manna from heaven for most business owners, prepayment has left behind a tequila-like side effect.

The problem is this. A top priority for all online businesses should be around Funnel Conversion, i.e. the ability for the business to convert leads into dollars, however in a world of prepayment, conversion becomes somewhat unimportant. In fact, if breakage (unused vouchers) is a profitable exercise for the merchant, higher conversion may actually mean lower short term profits.

Now that Group Buying is providing an ever declining proportion of revenues, many online businesses that signed up to breakeven or lossmaking campaigns in order to grow their subscriber base, now find they are unable to monetize that base due to poor site performance, especially in the area of conversion.

Faced with lower than expected revenues, these companies often head back to Group Buying to find that like-for-like offers work only half as well as they did before. Now the business is in a pickle, the drug is half as effective, risk its brand by doing twice as much? Surely you know your drug dealer is never your friend?

The key is to get the fundamentals of your businesses working right before looking to Group Buying or any type of Marketing for that matter. Ensure that the purchase funnel is converting 60% or more of the people who hit “Buy Now”, that your Subscription Channel is effective, and your email strategy is delivering appropriate Open, Click and Purchase rates.

When cloaked by the shiny veneer of Group Buying dollars your site performance will look a whole lot better than it really is. Time to sober up, shake off that hangover and see if your bedfellow looks as good as you remember.

Profiting from the fundamentals of Group Buying: Part 5… Instant gratification

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Group Buying is a compelling online purchase for the same reason that Music and Porn have been eCommerce stalwarts since the dawn of the Internet, because the purchase is instantly satisfying.

Unlike typical Online shopping, making a purchase through a Group Buying site means you are rewarded instantly with a Voucher or Coupon. Suddenly the customer has something real; the voucher guarantees access to the product or service and locks in the discount they have been savvy enough to secure.

Online discount shopping usually means trading off the available discount for the wait the customer will have to endure, versus paying a bit more to pick it up in store – in some categories customers are willing to pay significantly more if that means getting instant access, think Apple.

But more can be done to close the gap and make online shopping more satisfying. A voucher is a great start, something glossy and celebratory that serves to remind them how savvy they are. Game mechanics also have a part to play, with regular email updates documenting the journey of their purchase, building anticipation and a sense of fun. Lastly, why not allow pickup? If your business has physical infrastructure where the voucher can be exchanged, this is a tremendous opportunity to cross-sell (like a physical Thank You Page!).

Profiting from the fundamentals of Group Buying: Part 4… Group Think

Group Think is a very effective mechanic used in Group Buying that is perfectly suited for use elsewhere, other than where exclusivity is important of course!

By publishing the number of items that have been sold, consumers are comforted at the prospect of being part of a crowd and are more willing to buy, assured that many others have thought long and hard before deciding to make the purchase negating the need for protracted consideration!

The effectiveness of this this mechanic will peter out when availability concerns emerge, but until that point the strategy is sound.

Where access to specific purchase data is problematic, manually updating the Offer to state “more than 1,000 sold to date” works well…

As well as “number sold”, “people who bought X, bought Y” is an example of Group Think. Again these can be manually programmed where automation is not an option.