Been listening to a lot of the chatter about the group buying bonanza that is going on these days. The latest news is a rumoured large round for Groupon at a reported $1.2 billion valuation, close on the heels of a $25 million round announced by LivingSocial, which was shortly after Buywithme.com completed their $5.5 million round. The count is now more than 70+ group buying companies that have launched, with more coming each day. In addition, many content publishers are now beginning to think about entering the space. Is this insanity?
My simple answer: No.
I think the dynamics of group buying are very different than people think. In fact, I don’t like to call it group buying. I also think it has very little to do with retail merchandising. Instead, I put it in the category of perfected local performance advertising.
People have talked for many years that the local market is the holy grail for the next stage of online ad spend. The problem is how to convince the corner pizza shop or spa to value a “click” and spend money on this thing called “Google”. These merchants are way too busy in their day to day and have none of the time we have to study TechCrunch or Read/Write/Web to follow all the twisted ways we have come up with to advertise online. The companies that have become successful in local advertising have had to solve that problem in some form or fashion. ReachLocal kicked this off by creating a large overlay sales force to go in, talk to these local merchants, and deliver “in person” translation. Companies like Yext have skyrocketed by translating online advertising into the currency of the local merchant. “Have a gym? We’ll book you appointments.” Monetization at Yelp and OpenTable are related to things restaurants have done for decades – reviews & reservations. One clear takeaway – make something simple and transaction oriented, and local merchants will pay attention.
Coming back to “group buying”. What is group buying? Well, it’s a way for a merchant to give up some margin (aka, advertising dollars) to secure a purchase and hopefully build some incidental brand goodwill. In this case, activation by sufficient buyers and selling out are simply the game mechanic. If you’ve used any one of these sites, the offer almost always gets activated and many times sells out. The group buying craze is really a merchant paying some money for the best possible performance advertising you can have – A CLOSED SALE! (Not to mention some “in person CPM” thrown in for side benefit).
And now back to Groupon, et al? Well, their model is optimised around a tight, high volume operation versus a costly field sales approach. Over time, Groupon is building a database of every local merchant out there, and also a database of who has bought what in a local area. They’ve proven their ability to execute in 30+ markets and now will just manufacture the same city widgets 100 times over. As they are more successful, they can automate greater pieces of the system. Word of mouth begins to kick in. Data synergies such as re-marketing and recommendations become possible. Is that worth $1.2B today? I have no idea. But I do know local is big. Hundreds of billions of dollars big.
What happens to all the other companies out there? The big venture outcome game is probably over with the leaders already staking out their position. Other large local content players will get into the mix. But local has a few dynamics other segments don’t have. First, scale is less relevant than in other industries – a merchant can only service so many of the offers, and the offers are inherently relevant to the people in a neighbourhood. Particularly since most offers are services like a massage or spa. Second, to create good ‘rotation’, the Groupons of the world limit how many times a merchant can run a deal and the number of deals shown. If this perfected local performance advertising works for a merchant, they will gladly go to the next guy and see if it works on LivingSocial’s members, and after them, to the next person, and so on. Most scale businesses invite more of an activity, not restrict it. Third, relationships can matter. Small players can get to their local merchants and use charm to rope them in. So while many are highly sceptical, I believe there will be a slew of companies that exist in this market and can grow profitably for the next few years. Many should never take venture capital. But there is a long way to go to activate this market!
Amish Jani is a Managing Director at FirstMark Capital. This post originally appeared on his blog, and is reprinted with permission.
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