EXPERT COMMENT: Keynoir co-founder asks are daily deals fatally flawed or the evolution of marketing?

Daily deals - a marketing evolution

Glen Drury is an entrepreneur who currently consults for a wide range of businesses. He helped TravelZoo set up it European operations and co-found Keynoir, which was subsequently sold to Time-Out. Prior to this Drury was CEO of Kelkoo and senior vice president for Northern Europe for Yahoo.

For a couple of years now there has been huge hype around the new local deals model invented by Groupon. Quite rightly so, Groupon succeeded in connecting web usage to local commerce where many incumbents (Yell.com, Yahoo, Google, Amazon, Yelp) didn’t even come close. It is important to understand the drivers of its success, and also its flaws.

GROUPON’S BUSINESS MODEL
Groupon is in the distressed inventory flash sales business, a model that has been around for years, and has several great predecessors that have been extremely successful. The best example of the early players is Vente-Privee.com.  This is a business built out of the need of clothing brands to move last season’s fashion, almost at any price. It offers huge discounts of 70%-90%, which drives its customer acquisition, rather than spending traditional marketing dollars. In fact, originally, you needed to be invited by another member just to join.  Vente-Privee has grown its business to over 10 million subscribers in France alone. Other companies in this market include gilt.com, overstock.com and woot.com.

FLASH SALES PUBLISHER SUCCESSES
¤ New advertising model for local merchants. What Groupon did very well, was to apply this flash sales model to local merchants. It brought pay-for-performance to local merchants where there had previously been traditional only pay-for-placement ads.  This meant that most merchants had little risk in having a go at this new model.
¤ High response rates. Consumer response from all flash sales publishers outstrips the response from traditional advertising by a wide margin. On one occasion in my own business, one ad emailed to 5,000 clients generated 450 covers, while the same ad placed in the Evening Standard on ‘Foodie Thursday’ generated six covers.
¤ Localness wins. In America, this was a new phenomenon, unlike Europe, where there has been a healthy vouchers and coupon business for years, and where the geography of the countries means that most ‘national’ merchants are the same as local merchants.  Consumers couldn’t believe that their local merchant was reaching them with fantastic offers, and were willing to tell all their friends.
¤ Raising cash. Groupon may be the best company in the world at selling the dream, and raising fantastic amounts of cash. In the 12 months proceeding its IPO, it raised over USD1 billion in funding.

Overall, this new application of the flash sales business model seemed like a sure win for all three constituents: consumers, merchants and Groupon/LivingSocial

FLASH SALES ARE NOT SOCIAL
Tipping point doesn’t work: The concept of a tipping point (where no one gets the deal unless a minimum number of people agree to buy) drives only confusion, not greater spread of the deal. Early followers of the Groupon model based their business strategies on the hope that consumers would become the marketing team. Now it is rare to see the tipping point at all, and is a significant contributor to the fact that Groupon and its competitors spend so much money acquiring subscribers in the traditional manner.

FLASH SALES PUBLISHERS ARE FAILING
¤ Merchants are confused. One of the significant areas where Groupon and many other flash sales publishers have stumbled is ensuring that merchants fully understand how to make the most of this new marketing platform. The fact that many merchants say that this advertising hurt their business is the best indicator.
¤ Utilization of fixed assets. Replacing a full-price customer with a discounted one is a recipe for disaster. Airlines, car hire and hotels have understood the concept of utilization for years. They have created global distribution systems (GDS) to ensure that they are not left with unutilized inventory at the end of each day. If a plane flies with an empty seat, it has to spread the overheads to fewer paying passengers and thus prices have to go up. While at Enterprise rent-a-car, I saw that any cash collected for inventory that was expected to be unused, was pure profit. The flash sales publishers will have to work much harder in this area to ensure that each merchant truly understands how to win. Much like Google did with its business, Groupon will have to create merchant tools to measure profitability.
¤ No Self-Serve Merchants. The confusion and newness of the model require a heavy involvement of sales teams to get the best deals from merchants. Reading Groupon’s S1, the cost of sales people exceeded the revenue share that it made on deals, so there will clearly have to be changes. Today 80% of Groupon’s sales-force are telesales based, while Livingsocial only has about 20% telephone based.  With increased tools and market awareness this can change to a self-serve model like Google, but it will take time to come about.
¤ Subscriber fatigue. Most sites have gone away from just one deal a day to several deals per day, even multiple emails per day. What this practically means for the publisher is that engagement will decline over time unless addressed in a meaningful way.
¤ Noise, but not spam. Consumers stay subscribed, but delete the vast majority of the emails without reading them.  The important measure to watch is the number of engaged users amongst the subscribers.

FUTURE OF FLASH SALES
¤ Increased interest by ‘audience’ holders. Traditional publishers and others who have large audiences are looking to increase their revenues, thinking that their audience can be monetized with flash sales. While this may be true, most will enter with a misunderstanding of the difficulties of the business model.
¤ Lower than expected engagement. Owners of new flash sales publishers will have to carefully think of the model most appropriate for their audience. Just because someone signs up to get alerts or newsletters, or has a mobile phone or TV subscriptions doesn’t mean that they are ready or expecting to get local offers from that business.
¤ Being Creative. Opting in, highly targeted offers, new engagement models and push mechanisms other than email are a must for success.
¤ Birth of Sales Agencies. Just like PPC agencies that help advertisers get the most out of their Google campaigns, this industry is becoming ready for flash sales. Sales agencies will start to arise for three main reasons;
¤ Confusion in this market means it is ripe for intermediation. The level of sophistication among SMEs with regard to advertising either mobile or electronic is usually woefully short.
¤ Error is costly. In many cases, the first time a merchant hears about the model, they are willing to sign up, then when their offer is published, they discover that there are many elements that need to be controlled to ensure success: restrictions on usage of voucher, redemption period, value of offer, consumer contact, revenue share, breakage and exclusiveness of offer.
¤ Time equals money. It is common for a merchant to receive up to 20 calls from other publishers wanting a similar deal, once a deal goes live. These new agencies will handle all inbound calls, and help the merchant decide where their marketing money is best spent.
¤ New twists on the model. As we look to the future, more interesting takes on the flash sales model will become common.  Here are a few:
¤ http://www.vakantieveilingen.nl/ is a flash sales business that grew out of the travel sector, is self serve and uses an auction to set prices.
¤ http://www.shopkick.com/ and http://www.foursquare.com/ focus on monetizing check in, likes and purchasing.
¤ http://www.bellycard.com/ tries to build loyalty by enabling merchant’s old punch cards within an app. These are but a few new ideas coming, with many more.

In conclusion, this market is definitely not fatally flawed, rather it is a marketing evolution.  Changes are still to come, as it is still a new industry, and I for one can’t wait to see the next evolution.

Related reading

Leave a comment