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.
After bottoming out during the past few months, the fortunes of some Group Buying businesses seem to be on the up, albeit a significant number have collapsed or been acquired in the past six months and the outlook remains grave for many more!
The fact that the sector’s nose is slightly up is in part due to the weeding out of weaker and often less scrupulous competitors who often served only to undermine the reputation of the sector as a whole.
In fact out of the 50 largest Group Buying businesses assessed in April, only 29 remain intact just 6 months on. And given only 10% (5) of those businesses were acquired that supports the view that smaller Group Buying businesses are of limited real value. In such a crowded and undifferentiated market lifesaving investment is tricky too given a lack of brand equity, good will or asset strength (off the shelf web sites are common and subscriber base overlap with top-tier competitors is often well over 70%) resulting in the collapse of underperforming and debt laden Group Buying businesses.
A quick browse through the sites of the 29 still standing uncovered indicators of pending doom for some.
Here are the choking canaries of the Group Buying world:
A high degree of niche product deals, such as robotic vacuum cleaners or iPad accessories
No sign of “number purchased”, an essential component
of Group Buying that is quickly discarded when numbers are low
Extended Deal deadlines, this industry was founded on deal a day for good reason
A smorgasbord of deals on one page, suggesting desperate recycling of old offers
Group Buying remains a $1bn future industry in Australia, regardless if that industry seemed to lose its way and stall when it was only half way there. Regaining lost momentum will be down to the leading players showing the way once again with a combination of brilliant marketing and a commitment to helping consumers discover great business products.
The strongest already have their playbook (Living Social, Cudo and Ourdeal) and will extend their positions in the coming 6 months through a focus on back-to-basics Group Buying offers like quality restaurants, high value vacation offers and utility products such as Cudo’s Meat Merchant.
Although I suspect another 15 from April’s top 50 will be gone by April 2013, leaving only a dozen or so standing, I think I already know who they are, I wonder if they do?
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.
The 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!
“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.