Just when you thought the Group Buying space couldn’t heat up anymore, Groupon goes and gets a $135 million investment from DST and Battery Ventures at a more than $1 billion valuation. Groupon has proved how incredibly lucrative this business is as it has achieved a $1 billion plus valuation business in less than 18 months. In my last blog post, I discussed how the Gold Rush was over for Social Games. Well, it just moved over to the Group Buying business! A lot of things are happening in this space and the big question is how is all of this going to shake out?
There will soon be hundreds if not thousands of Group Buying sites
There are now over 80 group buying sites in the U.S. alone. I predict there will soon be thousands. Let’s talk about the barriers of entry. A service like Groupon which has scale in audience can go to merchants and ask for exclusives by guaranteeing high minimums and they will get them. However, their value proposition is about being selective and curating deals that they think are the most relevant. So in a city like NY where they feature 2 deals per day, they can only lock up about 800 merchants per year. NY has nearly 2 million small businesses and I suspect a good percent would be a good fit for a group buying service. Unlike flash sales sites like Gilt which have more scarcity in brands that they can work with, group buying sites have a much longer way to go before they actually really start stepping on each others toes.
So selling to merchants is not much of a barrier, how about the technology platform? Well, that is even more commoditized. These platforms have proven to be pretty simple thus far and are quickly becoming a non issue. New companies such as Group Commerce, Offer Foundry and AdBlade are already offering white label solutions to partners and only asking for a revenue share. I am sure there will be more solutions in the market with even lower costs. Some of these platform plays are also building out their own salesforce to bring in merchant deals. That way they package both commodities – merchant sales and the platform. The partner just needs to bring the audience. So with merchant sales and the platform not being much of a competitive barrier, what is the competitive advantage?
Race to the Inbox and staying there
At the end of the day, the only main competitive barrier is distribution in the Inbox. Email is proving to be the most effective way of delivering these deals. From a user’s perspective, signing up for more than 2 to 3 of these services is just too overwhelming. So the main goal for all of these players is to get users to subscribe to your email and to have them keep it there. Who will win in this race to the inbox? Well, those that can acquire email subscribers the fastest by either raising the capital to aggressively acquire users or who have existing audiences that they can get to sign up. But once you have them, you need to keep them. If you lack relevancy, the switching costs are so low that you will easily see them move elsewhere. Relevancy will be based on how well you match up the deals to the taste and preferences of the user. These services will offer greater filtering technology to show you relevant deals. I think this will be led by aggregator services like Yipit, who ask users for interest preferences such as sporting events, restaurants or spas and comb through the 80+ sites to show you the most relevant deals. The other route to go is for these services to be much more verticalized by demographics or psychographics. An example of this is Gilt City which caters to more luxury offers. So instead of offering the pizza place that Groupon features, Gilt City will feature the Michelin star restaurant.
So get ready for a new gold rush! There will be an unbelievable amount of competitors in the space. For consumers, great news as you will benefit from so many great offers. As for the competitve players, it’s all about execution……..good luck!