With reports rife that the once exploding daily deals and group buying* industry is on the verge of collapse, broad sentiment is that this recent addition to the retail industry is heading into oblivion.

However considering the ever-changing expectations of the rapidly evolving digital consumer, is this dip in the market a hint of what is to come for this seemingly burgeoning industry or does it indicate an opportunity for existing players to pivot their businesses and hit back harder?

In this two-part article, Kate Denman and Mark J O’Neill examine the rise and fall of this industry and identify the potential weaknesses of this business model.

Q. Are daily deals dead?

Kate Denman: It’s hard to argue that an Australian industry predicted to exceed $530 million in revenue this year is dead. Business models plateau: daily deals aren’t dead but rather they are simply growing up. Constant evolution and innovation are key to continued growth in any digital venture.  Consumers will continue to demand discounted deals while merchants will continue to aim to grow their customer base and revenue. The question is how can a highly satisfying, sticky and valuable experience be created? Perhaps through pivoting the business in terms of the following:

  • Shifting the structure of the deals and revenue model
  • Developing a highly personalised and sophisticated customer platform
  • Integration of a merchant platform
  • Greater socialisation

Mark J O’Neil: Daily Deal sites have seen phenomenal growth, made famous by Groupon’s 22,000% revenue growth in 2010, however the company’s recent results suggest that this business model is beginning to show flaws. Despite the early growth in daily deals the industry has recently been characterised by consolidation, losses and closures:

  • Closures – The ease and relatively low-cost of setting up a daily deal site, combined with an (often) unprofitable business model, has seen an escalation in the closure of daily deal sites with approximately 800 sites closed in the last half of 2011 according to TechCrunch.
  • Losses – Following Groupon’s initial success in the marketplace, the company has posted a slowed revenue growth over the past year and a falling share price. Similarly, fingers have been pointed at LivingSocial as being responsible for the downturn in the 2012 Q3 earnings of investor Amazon.
  • Consolidation – There has been an increase in the number of aggregators that are combining daily deal sites (sometimes with other offer based services such as gift cards) to provide an increased value proposition to the consumer. Whilst some of these hybrids are just starting their journey, such as MyCabbage, others like CityPockets have already needed to shut down their operations.

The industry size would confirm it is not going to fall over tomorrow, but falling traffic, losses and closures indicates innovation is required.

Q. What went wrong with the daily deals business model?

Mark J O’Neil: There are a number of factors influencing the downturn of this model:

  • The customer value proposition is strong, however the retailer value proposition is waning. Daily deal sites have achieved growth by presenting offers at such deep discounts, that customers have been compelled to interact. However, the retailers and merchants supplying these deals are now backing away due to the high margin required by daily deals sites. A survey by Rice University identified that of the businesses surveyed 26.6% lost money and 17.9% broke even on their promotions.
  • Customer awareness and acquisition is a promise, not a guarantee. Since daily deal sites act as an intermediary on behalf of the merchant, they rarely acquire repeat-customers. It is in fact the daily deals site that attracts repeat subscribers, creating a culture of deal junkies, rather than loyal brand shoppers/followers – a factor which has been off-putting for retailers.
  • Suppliers, particularly large brands, are not engaging for fear of price and brand erosion. The heavy discounting associated with daily deal sites is a flag to major brands (particularly in the FMCG space) that do not want to tarnish their brand, nor impact existing relationships with major retailers. These major brands are critical in driving eyeballs to the deal sites. Without the consumer eyeballs, or the supplier offers, the virtuous circle of both customers and merchants’ constant and active participation is not present and the business model becomes unsustainable.

In the second part of this article Kate and Mark will discuss pivoting strategies that daily deals models can apply in order to respond to the current market.

*Please note: For the purposes of this article the models of group buying and daily deals are combined and represented through the reference to ‘daily deals’. 

 

Contributor Placeholder

Contributor

Mark O’Neill

Mark O’Neill has worked in both large global corporations and small start-ups in the UK, North American and Australian markets.

Mark is passionate about building businesses and working in the ever-changing digital environment, and particularly excited by new ways of thinking, doing things differently and trying to find efficiencies in everything.

Mark’s career at PwC has included Digital Consulting and most recently launching PwC’s first ever SaaS business globally, Nifty R&D (www.niftyforms.com).

“Given the pace of change in the business world today, Digital is the most exciting place to be. We are seeing startups disrupt the market and drive a broad change in the way larger businesses now approach technology and innovation. This change brings with it significant opportunities for businesses, employees and customers alike.”

More About Mark O’Neill