So now to Part 2 on my thoughts on impulse discount ecommerce. A new category has emerged this past year – Local Group Savings. The two most popular sites are Groupon and LivingSocial Deals. If you haven’t checked them out, here is how it works. You sign up to receive a daily email for one heavily discounted deal in your local area. It is basically a coupon offer of 50% to 80% off but you actually have to buy the coupon making it more of a voucher. So you might buy a $100 spa package voucher for $50. However, this deal is not active until a certain number of people actually buy it. This encourages you to share with these deals with your friends via email, Facebook, Twitter, word of mouth, etc.
Groupon and LivingSocial take about 25% to 50% of the sales receipts as their commission. Yes! 50%! So as a local business, if you offer a 50% discount, you may only be getting 25% of the original pre-marked down sale price. Crazy right? Well not so fast. Local merchants have been very happy with the results. Here is their value proposition of why you should accept it:
- Chance for upsells while customers are in the store. A business that offers a voucher of $100 for $50 also gets the benefit of upselling the customer for over $100 while they are at the store. Anything over the $100 completely goes to them also improving the margins of the voucher.
- New Customer Acquisition. Since these vouchers are bought from impulse buyers and are sometimes even limited to new customers (such as dentist patients), these customer tend to be first time customers. A lot of these businesses are looking for new ways to acquire customers and will take any loss in margin as a cost for acquiring a new customer which they hope will eventually pay for itself in repeat business.
- Shot of Cash. These businesses often get paid net of commission within 10 business days of the sale. This is a nice injection of cash for businesses that deal with month by month cash flow issues. Certain business have seen a remarkable surge. Take for example, this story about a sky diving school which signed up 1,600 customers in one day. They normally only do 6,000 for the whole year!
So, it sounds all great. What are some predictions? Well, the main problem I have with this business is the lack of competitive barriers. Starting up these businesses requires very little capital . The most intensive part is the business development with the local merchants. However, what happens when all local merchants understands how these things work and know the benefits then there will less of a sales barrier and you can probably get them to sign up via telesales reps or some self serve interface. Then all of the players will start reducing their commissions to close deals putting margin pressure on the business. I can even see a player going in and offering 0% commissions in order to build an advertising supported model around this. So my prediction will be that this market will expand rapidly but may end up actually shrinking later down the line (the money that the group discount providers make) due to low barriers of entry.
Any other predictions? Please add your thoughts in the comment section below!