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!

Group Buying enters the Trough of Disillusionment, will it recover?

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Gartner describes the adoption of Technology (where there has been clear market Hype) using the Hype Cycle diagram. The same diagram can be usefully adapted to describe the current challenges facing the Group Buying industry given it was built on a platform of extraordinary hype and has since suffered its own decline. Also, much like how the Technology Hype Cycle describes the organic adoption of the technology over time once the Hype has dissipated and the useful nature of the innovation emerges, Collective Buying does add real value to Merchants and Consumers, and beyond the hype and the noise of Group Buying, that value add still exists – which then begs an interesting question, what is required to ensure an enduring future for Group Buying?

The key phases of the Gartner Hype Cycle are on the left of the table, an equivalent stage in the Group Buying evolution is on the right:

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I believe that to get through the Trough of Disillusionment and onto the Slope of Enlightenment, the players in the industry need to follow the 4 tenets of Effective Group Buying:

  1. Provide genuinely useful marketing services for Merchants, including valuable insights on their new customers and mechanisms to drive upsell and loyalty
  2. Minimise the promotion of irrelevant offers through investments in targeting technology
  3. Add Value to their members through genuine discounts on products and services
  4. Underwrite their offers with a suitable customer support policy and helpdesk

Profiting from the fundamentals of Group Buying: part 2… Fleeting

It is common for consumers to react negatively to a deep discount where they don’t understand the reason for the sale. Often customers will assume there is a hidden catch, something they can’t see that others can, reasons they will look foolish and regret the purchase – in each case they will walk away from a discount rather than risk being exposed… to prevent these barriers emerging is it critical that consumers are provided with a sound rationale for the sale. This is a fundamental principle behind Group Buying, providing sound explanations for the discount, i.e. group discount, time limited offer, discount in exchange for promotion etc.

Consumers are a savvy bunch, without a clear explanation for the discount, the customer will assume there is a catch and walk away.

imageThe second mechanism employed in Group Buying to illicit maximum discounts from Merchants (and ensure impulse behaviour from consumers) is by making the offer “Fleeting”, i.e. limiting the time an offer is available in order to drive customer action through our basic fear of missing out!image

“Fleeting” is a critical function of Group Buying and Flash Sale sites and is incredibly effective at driving action. Fleeting is also used to great effect in the real world through “stock take sale”, “this weekend only” and “closing down sale”.

By time-limiting offers and proving game mechanics to generate excitement and drive action a lift in sales is guaranteed.

Much like the other tactics covered here, though, the use of a timer has to be genuine, like the Rug Store with its perpetual “closing down” sale, savvy consumers will quickly see through a fake deadline.

Profiting from the fundamentals of Group Buying: part 1… Focus

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Group Buying works for a reason, regardless of the service woes plaguing the industry (which have been driven by a combination of greed and inexperience, not the model itself) the principles behind Group Buying are sound. Over the next few posts, I will explain the key mechanics and position them in a series of non-Group Buying contexts.

There are six key mechanics inherent to the category that are designed to illicit an emotional response, such as an impulse purchase.image

This is the first of six posts I will write that describe those mechanics.

FOCUS ATTENTION ON ONLY A FEW OFFERS

Limiting promotional efforts to only 1 – 3 featured offers enhances the perception of those offers and likely uptake, minimising “noise” around those offers will further spotlight the chosen few. Featuring multiple offers on the other hand dilutes the “WOW” and runs the risk of Paradox of Choice effects.

Most email platforms will support controlled tests, such as sending one control group an EDM with multiple offers, one with the three best offers and one EDM with only a single “hero” offer.

Assuming the control conditions are sound, the likely outcome is that the Hero and “three best offers” EDMs will each provide a click through rate that is greater than the “multiple offers” EDM even though the multiple offers email included the featured offers from the other tests.

Finding the right balance is critical, and running controlled A/B and Multi Variant Tests will find that balance.

GroupOn here in Australia, Bait and Switch is tactic #1

I was disappointed to hear about GroupOn’s Bait and Switch issue concerning the Valentine’s Day offer with FTD, however I immediately jumped to their defence.

A large part of Cudo’s operation is focused on ensuring that the offers we provide are 100% genuine, not just because we advertise on TV and are subject to rigorous standards, but because we believe the long term success of Cudo is hinged upon trust.

Our Merchant partners have to trust that Cudo will do the right thing by them by providing a great audience of new customers, broad brand promotion as described and payment in full within five days. And our members have to trust that Cudo is all about genuine no-brainer offers!

GroupOn must also have a whole team of people focused on ensuring that offers are “as stated”, hence why I jumped to their defence. However after seeing the following “all you can eat” ad, I am no longer sure!

Clicking on the ad for $8 all you can eat Macaroons takes you to a sign-up page, no such offer exists.

Deceptive. Yes. Bait and Switch. I think so.

Unless I am missing something, this type of Bait and Switch advertising is way out of line and threatens to damage the market as a whole. One thing is for sure, Cudo will never resort to these desperate tactics.

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