On increased competition from verticals and portals – completely agree. Verticals like DailyCandy or what we are doing with moms with DoodleDeals will offer deeper relevancy for specific categories. I also think that other local ad/commerce services will converge to support a vertical like Opentable also getting in the deal space. Portals will also throw their hat in the ring. However, I believe that there will only be a small handful of dominant large scale players and a good mount of middle tier players in verticals. The main reason have limited capacity of even being notified of deals. Email is right now the vehicle of choice and consumers won’t subscribe to more than 2 or 3 at most. So the ones that get scale and are relevant should stay there b/c consumers won’t continue to sign up for too many of these emails. It is just too much. Probably also the need for Yipit which we are investor in.

As for the improving economy, I think we will have a good decade with 9 to 10% unemployment and in Internet years that is an eternity.

Thanks for sharing your perspective, it is clearly very insightful. When I first saw the Group Buying craze while working as a junior VC i thought the same thing as yourself; since the barriers to entry are so low, competition will make these current economics unsustainable in the long-term.

I do agree that you are right in that competition hasn’t yet hits its stride in this space, but I am still sincerely wondering why the above wouldn’t happen when it does. Once group buying offers become a common source of revenue on portals like Yelp, AOL and niche content sites eg: Daily Candy, there will be more than enough traffic to service multiple daily deals on each site, increasing the competition for sellers and then depressing the margins of group buying sites as you mentioned earlier. After looking back over the numbers there seems to be more than enough traffic at conservative conversion rates to fulfill very large inventory demands, assuming that group buying becomes a commonplace source of revenue for content providers and other high traffic sites.

It also seems clear that competition for sellers will increase as some sellers step away from the “firehose” because they have come to learn that it doesn’t fit their economic model, even when they have few customers due to tough economic times. A process that only seems to be beginning now (would be very interested to know if you think this is true for particular sellers).

In addition to the above two factors, wouldn’t you expect that improving macro-economic conditions would cause many of the highest quality sellers to step away from group buying as a source of customers. In theory, as the economy improves the most common best sellers (dining and spas) wont need group buying as much as they do now.

Your point is well made but i am still wondering if the above three dynamics combined aren’t enough to make high quality sellers scarce and depress margins as you mentioned earlier.

If you have a moment or are considering writing another post soon I would be thrilled to hear your thoughts on starting a vertically focused group buying site in today’s competitive landscape. Specifically, what are he factors for success and where you think those sites can effectively compete with giants such as Groupon.

Looking forward to more great posts.

Best regards,
Sergey

I actually think the big margin deal business will struggle keeping those high margins, over time. Even for the top tier “scale” folks as merchants that can handle the firehouse evolve with their use of deals (and technology) to drive profitable customers.

There is a good argument and empirical evidence in the marketplace that a number of decent sized merchants get crushed in this high Groupon deal model. The smart ones will either move on or figure out ways to adjust with technology or service providers to consumer buying patterns. I actually believe in the growing popularity of Facebook deals or the Google meets eBay self-service model. Net net – given the popularity and demand from both sides there is lots of development activity going after the margins and consumer dollars.

Don’t get me wrong – the business remains exciting with opportunity, yet i believe the landscape, merchant value proposition, and consumer deal purchase experience will evolve rapidly.

I do think that size and stage of company matters. There is a certain point (this is different for every company) where things do change, despite the goals of the leaders and the great people they hire. In my experience, that 100 person number is when things really start to shift from “start-up” to “organization.”

I love this posting and have talked about it several times since you first mentioned this concept to me. I’ll be passing this along to all the people at SinglePlatform as well as the “family/tribe” from SeamlessWeb as well.

Thanks again for meeting up for lunch.

Best,

Wiley

Great leaders foster great families. Size does not matter. People do.