2010 was the year of group buying. And what a year it was — filled with innovation, drama and an early look at what’s to come in 2011.
From the ashes of a few Internet “bubble” giants, group buying via local commerce came back to the forefront of the American (and now international) consumer this past year.
Perhaps a little ahead of their time, companies like Mercata and MobShop were onto an idea that was a $1 billion+ business over a decade ago – not surprising to me, at least, we saw it happen a lot sooner with a company solely dedicated on local services rather than its forefathers with physical products.
A market valuation of said company at $6 billion took the world and press by storm, with folks scratching their heads, “Woah. How did I not think of this idea?!” When the company turned down the offer, I remember getting a text message from a friend that read: “Did you see this? They just turned down the acquisition from Google at $6 billion – they are out of their mind.”
I didn’t think so. In fact, some argue that local, social commerce is a trillion dollar market and group buying is the first attempt to carve a piece of this large pie.
There’s a lot more longer term work to be done in this space (5-7 years out) to really squeeze complete value out of the market. Late 2009/early 2010 was the “trigger” to get things started.
Throughout this post, I’ll be using Gartner’s Hype Cycle graph to explain group buying and social commerce in the first two phases along the “Visibility” Y-axis and “Maturity” X-axis. I’ll change the names on some of these phases so that it fits the documentation of social commerce this year. If you’re new to Gartner’s approach to identifying new technology and markets, you should check out this great post from the research firm that explains the phases in great detail.
Late 2009/Early 2010: Technology Trigger (Market Introduction and Development)
Although not technically in the last year, late 2009 was an important turning point for group buying in the business to consumer market. If you look at the group buying and local commerce model (which is already very well discussed, analysed and critiqued, you know that the magic formula to start a business like this is quite simple: one part local salesforce + one part email acquisition machine + one part editorial = a group buying (or “daily deals”) website. Obviously, this is a tremendous oversimplification but the DNA of the business really captures these three parts totaling the whole.
So, what’s so special about late 2009? There was a company that was under the “buzz” radar, going about their business and absolutely executing the new model that it caught the world by surprise. It wasn’t until December 2009 when the market leader received a Series B round at $30 million to continue development of the group buying model that the Internet ecosystem first noticed that this was the start of a huge trend. Our company, Scoop St., which operates a group buying business in New York City and started in 2008, picked up attention from the those who sought to predict and develop the future with their wallets: investors.
The introduction of group buying, at least to investors, during this time took shape in this historical round of financing from the market leader via Accel Partners. All of a sudden, the money market was looking at private companies operating in the same space planning to deploy capital in hopes of developing the business into what looked like an early hit like the market leader. The road ahead, to investors and entrepreneurs in the space, was promising for expansive geographic plans.
By early 2010, the competitive landscape really began to heat up. I remember receiving a new email signup to Scoop St. from at least one new competitor offering a daily deal in the US and sometimes overseas once a week. It started to pick up by winter’s end with two to three new signups from a competitor PER DAY.
If you can visualise the Hype Cycle graphic, we’re moving up the graph during this time in a very accelerated manner (a matter of months) due to how a business in the group buying space operates. With little to no defensibility during the first phase, competitors increased at what felt like an exponential rate as more press, hype and reputation solidified throughout the market. From the investor’s standpoint, this was the honeymoon period where the development of these businesses moved from apartment ideas into executable operations with hefty funding amounts for staff growth (sales) and email acquisition investment (AdWords, Facebook, etc.)
But investors, like the few of us in the beginning who saw the market during infancy, knew that there would be a time where not every company in the space was going to be a “winner” for money invested and money earned. Group buying, for investors and the entrepreneurs who picked up funding, was not a zero sum game. It was a not a market where one company won and another lost. In fact, the market in 2010 would prove that many companies could operate and build meaningful business. Note: what is “meaningful” to one entrepreneur in this space is vastly different from another, considering a self-funded business built for a $5-20mm opportunity to that of a venture-backed operation approaching a multi-billion dollar market.
Mid to Late 2010: Peak of Inflated Expectation (The Signs of Saturation?)
With enough interest into this model around deals offered from small businesses, the competitive landscape continued to increase. My last count, I’m seeing somewhere close to 200 companies operating a daily deals website throughout the US alone. Was the market starting to get saturated?
From an outside observer, it can be argued that the market was saturated and sustainability into long term operations was not possible. At this time, claimed numbers showed that only two companies in the US were commanding 90%+ marketshare (and quite possibly, mindshare) for group deals. Interestingly, the 10% long tail slice (over 198 of the 200 total companies) pushed out new innovations into a model that was less then a year old at this point: free deals, aggregation, private label technology for publishers, self-service, user submitted/curated deals and location aware deals via check-in.
The deals ecosystem started to splinter into smaller subsets catering to different constituents by small business category, i.e. only restaurant deals, consumer demographic, i.e. deals segmented to only Jewish users or geographic region, only New York City metro deals while new, functional businesses were getting created to cater to the expansive deals landscape. A handful of these 10% companies will make significant returns for their institutional or angel investors but few (if any) will see lofty valuations in the $1bn+ range reported in the last few weeks.
Looking back in the spring, I remember having conversations with investors and daily deal sites founders that valuations, strategies for market expansion and email acquisition would be comparable to the market leader and second largest site. The expectation, according to those observing the market, was that public comparables were so strong that it’d be foolhardy to operate a different strategy than Large Site #1 and Large Site #2. The daily deals koolaid was so abundant that everyone wanted in on it, and I mean everyone. National media companies were sniffing around the space to acquire the right team and email database. Affiliate networks were knocking on the deals sites’ doors to get a piece of the prized email acquisition puzzle as the two largest sites were running the show on AdWords and Facebook’s advertising platform with sub $4 CPAs.
Money wasn’t to be made. Rather, money and lots of it, was already flowing through these sites at a rate that was unfathomable. Could the market get any larger? Absolutely. Earnings only for a select few would continue to increase at a rate that is not linear but exponential.
Now, at the end of 2010, I don’t believe we’re at a point where the market is saturated based on the local offer model growing due to increased participation from small businesses and continued consumer interest via large scale email acquisition. Given that small businesses are much more educated on the idea and are seeing positive results on new customer acquisition, small business owners are becoming savvier as to which daily deals site they want to produce an offer relative to which site can provide better segmentation. On the flip side, consumers are still showing significant purchasing power toward local offers albeit their spending is targeting select daily deal sites due to “offer overload” in the inbox.
2011 and Beyond
Many wonder, can the rate of growth and earnings continue to increase in this space? If we can learn anything from previous companies with a relatively comparable model (eBay’s network effect [PDF] or Gilt Groupe’s ability to verticalize product offerings), the market will move past complete saturation into consolidation in the coming year and later, shrinkage (or as documented in Gartner’s graph, the Trough of Disillusionment). Ultimately, and I may be biased here, but what is called “group buying” by pundits is extremely early in the growth period as education largely occurred for all parties involved this past year: small business owners, consumers, press, investors and analysts. Specifically, we have yet to see innovation around local, social commerce to completely reach the Plateau of Productivity or what I see as market efficiency – but there are steps to get there:
- Customer Segmentation – Hyperlocal deal offerings, with near limitless demand: The holy grail to localised offerings is the ability to target by geography and psychography. Take New York City for instance, specifically Manhattan as a sub-DMA. With 8 million consumers, Manhattan presents an opportunity to segment, develop and produce deals to what it near limitless demand. While there is an unstructured balance between the element of surprise to what deal shows up in the consumer inbox each morning (the “deal-a-day” model), some deal sites are already starting to “slice” large cities like Manhattan into specific geographies. This significantly improves core business metrics, i.e. higher email open rates, higher click through rates, increased relevancy for the consumer, reduced inbox overload, etc.
- Commerce Meets Content, Community – Unique and customised deal experiences: After beta testing for a few months, Scoop St. opened to the public early 2010 with a food crawl in the heart of the East Village along 7th Street, arguably one of the best streets in Manhattan for food lovers. Our sales team created the experience not found on any menu or other website, rather, it was a “deal” that wasn’t really your typical group offering. In this case, sites like ours discovered an opportunity to create a level of defensibility in the marketplace while rewarding our customers to an extremely high level of value. Especially for larger, more urban markets throughout the world, customised experiences will connect more deal subscribers to small businesses, helping to create a stickier environment.
- Merchant Management – Better management tools for small business owners, more customer retention: We’ve seen that group buying can bring thousands (sometimes tens of thousands of new customers) to a small business. However, what happens after customers arrive at the location? While the buying mechanism for local offers is used as a marketing acquisition tool, the small business is left out of the loop once the deal site’s job is done. Some companies in the 10% long tail slice are beginning to innovate on offering incentives for customers to return to businesses after the first deal while the market leader has released a helpful mobile tool for business owners to manage deal vouchers – all a first step into providing more relevancy to the business owner and what’s important to them: new and repeat customers.
Of course, each of these three categories can be developed in much greater detail with sub-categories and business processes built for each. Ultimately, I believe you’ll see tremendous value creation across revenue, reputation and brand awareness if these three categories are executed correctly in the coming year(s).
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