Attack of the daily deal sites

Online sites touting the power of group purchase and luring customers with heavily discounted daily deals are fast gaining popularity in the United States, a trend which a Frost & Sullivan analyst believes will catch on in Asia-Pacific markets while still remaining niche.

Online daily deal sites, such as Groupon and Woot.com, work by featuring a different deal a day along with a time limit for the purchase. Interested buyers then opt in for the deal, which will be available to them only when the minimum number of buyers is reached.

Products can range from pole dancing lessons to food & beverage and manicures, and discounts offered can be as high as 50 percent.

At the end of the time limit, if the minimum number of customers is reached, buyers will pay for a coupon for the discounted deal. If the minimum number of buyers is not reached, the deal is called off and users do not need to pay. However, some limited deals work the other way around--ending when the maximum buyers is reached.

This alternate online business model has even caught the eye of e-tailer giant Amazon which acquired online daily deal site Woot.com in June 2010.

In an e-mail interview with ZDNet Asia, Phil Harpur, senior research manager at Frost & Sullivan, noted that this alternate online business model is working very well in the United States, and will likely spread further in the region.

According to Harpur, one of the inhibitors for conventional online shopping models is the retailers' difficulty in maintaining sufficient product margins to remain profitable because they face heavy discounting from physical stores.

Daily deal Web sites are successful because they not only replicate the heavy discount strategy of the physical stores, they also provide real differentiation in pricing, which is appealing to customers, he said.

"Price is a key driver of online shopping, so heavy discounting via this kind of model is very appealing," he said, pointing out to private sale sites such as BrandsExclusive as another successful alternative online model.

While the growth rate for these new business models will be well above conventional online shopping, Harpur noted that the former will remain a complementary service to mainstream shopping and account for only a small percentage of total online revenues.

This is because while traditional e-commerce stores cater to the mass market, daily deal sites target a certain age group. Singapore-based sites that ZDNet Asia spoke to gave an age range of early twenties to late thirties.

Challenges of maintaining a daily deal site
Setting up and maintaining such a business is not without its challenges. In an e-mail interview, Karl Chong, founder and managing director of daily deal site Beeconomic, said the Singapore company faced two key hurdles during its growth.

At the start, the company had to establish market credibility without any track record. "We were bringing a new concept into Singapore and didn't want merchants or consumers to see us as just another discount site, but one that was community-driven," he said.

As the business matured, the main challenge lay in keeping the featured deals "interesting and cool", he said, adding that the firm continually sources for more fun and exciting buys.

Daphne Teo, co-founder of Bigdeal.sg, said the challenge for her business was to build up mutual trust between the three parties involved--the local businesses, customers and the site.

"Customers have to trust us for our daily recommendations and be willing to try out new things...featured on [our site]," she said. "Local businesses have to trust in our ability to market their products and services for them, and to offer us deals with cut-throat prices.

"[We have] to trust the businesses that they are offering good deals to our customers and [that] there're no hidden clauses that could damage [our] reputation," she said. And from the customers, "[we have] to trust that they would be supportive of our deals [so that we] could give businesses a higher 'minimum purchases' in exchange for better deals", she added.

Keen competition in the e-commerce space means daily deal sites have to go all out to be noticed. Beeconomic's Chong said his site offers a referral credit system where users can share the deal with their friends and earn S$5 for every referral made, with no limit imposed on the referral credit earned.

He added that the site also allows its users to buy not only for themselves, but also for their friends, something that other sites do not permit. The company also backs every deal; in case a merchant closes down after the deal is bought, Beeconomic will offer a full refund, he added.

Bigdeal.sg's Teo said her company invests a lot more time than its rivals in researching for good deals. "If you go through past deal records on different sites, you would realize the other sites all feature repeat deals and probably a longer period for a deal. Bigdeal.sg has not done that," she said.

She added that users can also submit their wish list to the company, and it will work on getting those deals on the list.

For both companies, customer service is a top priority. Chong said the company invests heavily in providing the best customer support to respond to customers quickly.

Bigdeal.sg's Teo said the firm encourages user feedback on hiccups during redemption and unpleasant experiences with deal features so that it can "sort [these] out" with the vendors. Local businesses with bad reviews from customers will even be blacklisted, she said.