Daily deal biz model still viable despite upheavals

Daily deal biz model still viable despite upheavals

Summary: A raft of exits from the group buying industry signals consolidation as operators refine their offerings and improve service standards for retailers and consumers, which should bode well for the overall market.

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TOPICS: E-Commerce
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The closing of a number of group buying sites in recent months does not mean the daily deal business model is not sustainable, but signifies an ongoing consolidation of businesses as well as experimentation by retailers, say market players. 

Daphne Teo, head of commercial operations at Plus! BigDeal, a Singapore-based daily deal operator, said the market is consolidating as various players merge or acquire other businesses.

Many of these companies came into the industry when it was at its peak thinking it was easy to run such a business and they could catch up with the early-movers, Teo noted. But just like any business, there are fixed costs to overcome and companies would need to quickly gain traction and hit a critical mass in order to develop a scalable business in order to be sustainable.

These entrants subsequently realized it was not so easy to run their businesses and decided to exit, resulting in the recent spate of closures and mergers, she explained.

Nothing wrong with business model
Olivier Michel, co-founder and general manager at another local daily deal company StreetDeal.sg, agreed. He said group buying, in general, has very low barriers to entry as interested parties can set up a buying platform for less than US$100.

"However, scalability is a major issue and players who don't monitor their marketing investment carefully can quickly get trapped with cash management issues," Michel said.

He pointed out there were up to 60 group buying Web sites operating in Singapore as recently as 2011, but the number has since dropped to under 30 today with Outlet.com.sg an example.

In China, the China Electronic Commerce Research Center (CECRC) reported that while 6,069 group buying sites were set up as of June 2012, 2,859 of these have already folded.

Despite the exits, the general manager thinks there is "nothing wrong" with the industry as the business model continues to represent a tremendous value proposition for customers. Those which have left the scene could have had difficulties acquiring and retaining their customers due to the lack of marketing professionalism or poor customer service, he said.

There were others that did not take the business seriously and were out to gain short-term profits, added Teo. This led to customer complaints about unresponsive daily deal operators and participating merchants not fulfilling their offers, she noted.

The executive believes service quality by group buying service providers to merchants and customers will improve through such experiences, though. After all, merchants which complain of operators being "arrogant", for example, will go and look for better partners to promote their products, she said.

Karl Chong, CEO of Groupon Singapore, also expressed his confidence that the growth potential for the group buying industry is still strong. Given the e-commerce market in Singapore was worth an estimated S$1.1 billion (US$879 million) in 2010 and is forecasted to hit S$4.4 billion (US$3.5 million) in 2015, and as more people get comfortable with online shopping, there will be a huge potential for local business to offer more choices to consumers through group buying platforms, Chong stated.

Merchants still keen
On the retailers' end, the benefits of the daily deal model have yet to be justified. Michael Beck, senior marketing specialist at U.S.-based OpticsPlanet, said the company had signed up with group buying sites to offer discounts to their products because of the promise of wider exposure to the masses.

However, its experiences with daily deal sites "have been neutral at best", Beck told ZDNet Asia. "We experimented with multiple daily deal sites on several offer formats. In only a couple of cases did we see a branding effect that could have been considered promising," he said.

The marketing executive added the vast majority of its customers via such promotions were "one hit wonders" who spent the minimum needed to achieve the advertised discount value. A "small percentage" of customers might return for further purchases, but the percentage of true new customers was low, he revealed.

Similarly, a Singapore-based merchant said more than 95 percent of its customers who bought a voucher from the shop were bargain-hunters who never came back. The retailer, who wanted to remain anonymous, said: "In fact, while some of them [were at the shop], they were already on the phone trying to book appointments for the next two weeks using other vouchers."

Both retailers added the revenue-sharing model between them and the daily deal operators did not add much to their revenues, if at all. Beck said OpticsPlanet "never achieved" any of its revenue goals, while the local merchant said each redeemed deal meant it incurred a loss in terms of manpower costs as the profit from the deal was not enough to cover the additional costs from hiring part-timers.

However, they both have not given up on group buying and are experimenting with different forms of the business model.

OpticsPlanet, for instance, is testing "product-specific offers" with a few operators, Beck said. He noted this method emerged after many daily deal sites realized the limitations of their platforms for retailers and calibrated their offerings to promoting specific products and services.

There is a "huge disadvantage" with such offers, though, as these vouchers would limit the merchant's exposure and value of the promotion to just that product, he acknowledged.

The Singaporean retailer is also experimenting with Dndbay.com. "It doesn't make me compromise on the price of my services if I don't want to...and their percentage of earnings is much lower," the owner elaborated.

The usual teething problems exist with Dndbay.com as it is relatively new and its consumer database is still growing, so response to offers posted by the company has not been as good as those it promotes on other sites. The business owner is confident Dndbay.com will improve in time, though.

Alvin Lee, co-founder of Dndbay.com, believes the company's policy of charging a flat fee of 15 percent for all products sold on its platform would prove a better fit with merchants as it eliminates the need for them to deal with a middleman and pay for their services.

"The revenue sharing model makes it horrible for business, especially smaller ones, as they are expected to give a 50 percent discount for their deals as well as pay the daily deal site up to 50 percent in commission. As a result, businesses are left with virtually nothing," Lee stated.

Topic: E-Commerce

Liau Yun Qing

About Liau Yun Qing

The only journalist in the team without a Western name, Yun Qing hails from the mountainy Malaysian state, Sabah. She currently covers the hardware and networking beats, as well as everything else that falls into her lap, at ZDNet Asia. Her RSS feed includes tech news sites and most of the Cheezburger network. She is also a cheapskate masquerading as a group-buying addict.

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