The Daily Deals Space:Groupon and

AmazonNick TimmonsStudent – UIUC MS-Technology Management

Daily Deals Industry - History

• The Concept of Online Deal Platforms first takes off in 2001, with the founding of Vente-privee.com

• Other “Flash Sales” sites, like Woot.com and Gilt Groupe, follow soon thereafter

• Eventually, flash sales evolve to incorporate the concept of group buying into daily deals

• In steps Groupon in November 2008

The Daily Deals Industry (DDI)

• "There's never been anything--radio, TV, newspaper, whatever--that could generate small business sales so quickly. We want to do for local e-commerce what Amazon did for normal consumer goods."

– Andrew Mason, CEO, Groupon• According to a study released by BIA/Kelsey in Sep ‘11, gross revenues are projected to grow from a current $873 million to $4.2 billion by 2015 (a forecast revised upwards 64% from a BIA study in Mar ‘11).

Overview -• Founded in Chicago November 2008

• Name = portmanteau of “Group Coupon”

• Current revenue run rate of $100M per month

• Operates in >500 markets in 44 countries

• The fastest growing company, by revenue, ever

• Valuation: $7.67b, and plummeting (most recent earnings pop notwithstanding); down from Nov. IPO price of $15b

• No Syndication; push deals via massive sales force and good copy

Overview - • Launched in June 2011 in Boise, Idaho, “a city that

embraces fun,” to signify the kind of “adventurous spirit [they] want customers to experience everyday.”

• Began with an evolved aggregator model, in order to leverage its $175m investment in Living Social.

• Beyond their entry play, AmazonLocal is moving towards personalization, where they can really leverage their existing platform of 164m subscribers.

Rivalry-HIGH-

Threat of New

Entrants

-HIGH-Bargaining power of supplier

-MEDIUM-

Threat ofSubstitutes

-LOW-

Bargaining power of

buyer-HIGH-

+ Attractive profits, requires little technology+ Low differentiation in offerings+ Extremely easy model to copycat- Larger scale operations are most successful- Lack of a syndication model

- DD sites depends on vendors - Low switching cost- Discount erodes brain value+ Gain access to huge market+ Drive traffic and awareness+ Low financial risk

- Low to no switching cost- Similar products/services

- New services using mobile and social platforms + Disrupted printed ads, radio deal

- Over 400 clones in U.S- No consumer loyalty- Low differentiation- Easy to imitate+ No exit cost

The DDI – Porter’s Five Forces

Critical Factors for Success in DDI

• LTV : CAC– Life Time customer Value– Customer Acquisition Cost– 3:1 is optimal target ratio

• According to HBS Professor Tom Eisenmann

• “Groupon Anxiety”– Customers get SO excited to view new deals each day– Must be careful in making future usage estimates based

on initial high usage rates; essentially overinflating LTV and causing too much expenditure on customer acquisition.

Critical Factors for Success in DDI

• New channel development– Social Networks

• People want to buy what their friends are buying and want to leverage the same deals people in their network are taking advantage of.• P2P/Viral Marketing • Peer pressure

– Deal threshold generates larger impulses to engage in multiple buys, and also motivates customers to find their friend to purchase the offer together.

• Easier to be accepted– Message from known source (friend) has larger

chance to be read.

Critical Factors for Success in DDI

• New channel development–Mobile

• Given the group buying nature of the daily deals, and the fact that they need to reach a

“tipping point”, minimizing transactional frictions is a must. Being able to buy whenever, on the go, is thus crucial.

• This is THE crucial future customer touchpoint. One only needs to look at the heart of the facebook IPO situation. Financial growth

models don’t work as well when “socially oriented” businesses” (in the Web 2.0 sense) can’t monetize their user base on a mobile basis.

Critical Factors for Success in DDI

• Create centralized portal for end-users and vendors– Customer-Centric View: Strong bargaining power

w.r.t. suppliers means Group purchasing may generate larger amount of discounts

– Vendor-Centric View: Can reach more end-usersand thus improve advertising cost performance

“When asked, 87% of people said they would increase their use of daily deals if they could find only deals

that interest them all in one place.”• Lisa Gurry, Bing Deals

Critical Factors for Success in DDI

• Enabling Impulse Purchasing• Uses time limitation to cajole customers

into making decisions in the moment• Deal thresholds also improve impulsivity

and encourage multiple purchases• Customers can not predict what the next

product/service will be– Creates a palatable sense of excitement

about what could or should come next!

Critical Factors for Success in DDI

• Enabling Impulse Purchasing

DDI’s Holy Grail = “e-tailing locally”• A key component to internet retailing and e-

commerce is the necessity of waiting between purchase and consumption.

• Daily Deals represent a way to marry the efficiencies of the web to local commerce, to purchases driven by impulse that can be utilized right now.

Success factors of Groupon• First Mover Advantages– Developed a significant lead in securing

customer loyalties at a time when purchasing habits for local are up for grabs. • As with, say, Target using statistics to perform

behavorial research to target pregnancies earlier, at a time when purchasing habits are similarly up for grabs

Success factors of Groupon• First Mover Advantages– Earned, and still earns, above avg gross returns

• Harvard Working Paper - “We are struck by the large fees that leading discount voucher services charge…large fees relative to Groupon’s marginal costs of voucher provision.”

– Scaled as quick anyone ever has• Given the powder keg that is local e-commerce, the

first to discover it was always going to grow fast.– Full attention on single business

• This leads to “extras” like the importance of copy as small competitive differentiators.

How Groupon Defends vs. DDI Competition

• Vendor lock-in– Groupon signs exclusive contract with vendors

• Buffer clause in the contract– Prevent vendors from signing another

contract with its competitors for N weeks/months

• Human factor (Sales Forces)– The furthest on the learning curve

• Outbidding anyone else on paid acquisition

Groupon - Securing Porter’s Five Forces

Vendor Lock-In

Buffer clause

Strong Sales Force

Customer Acquisition Cost drive up

Success factors of AmazonLocal

• Second Mover Advantages– Benefits greatly from getting involved 2.5

years after industry inception, because demand is far less uncertain

–Market Research to further serve customer needs can be more readily implemented

– Learn from First Mover mistakes, like Groupon’s LTV-CAC miscalculations, or its refunding policy problems

Success factors of AmazonLocal

• Large (and fast) logistics across the country (1-2 day to door delivery)

• Broad variants of business– Does not have to rely on single service.–More tolerance for specific industry

fluctuations.• Existing E-tailing platform– Experience building an internet commerce

platform is immeasurably valuable when creating a local e-commerce platform

Examples of Success - Groupon

Groupon

End Customer Vendors

Provides 50% discount chance Provides chance for ads

Groupon holds the largest the daily deal record.

$15.6m for Nordstrom Rack

Examples of Success - AmazonLocal and Living Social

Amazon

• $20 Amazon Gift cards for $10• 1.1m deal (cards) sold • $11m in Gross revenue• Year’s most successful

Living Social deal

AmazonLocal:

• Amazon $5 for $10 Gift card• Fastest selling deal in the

industry’s history• 1m deal (cards) sold in 17

hours• $5m in Gross revenue (5x

normal weekly operational revenue)

Jan 19, 2011 One year laterLiving Social + Amazon:

Invested $175m Develop its own platform

The Future of Daily Deals• Key Distinction between end users

and merchants.

End Users want value added services that help them satisfy their behavioral drives NOW. They want to interact seemlessly and are ever increasingly mobile. And “saving 50% or more everyday” binds the purchasing decision together.

The Future of Daily Deals• Merchants– Harvard Working Paper - “Our model reveals that

a discount voucher service is more likely to be profitable for affiliated firms, all else equal, if customers using that service have valuations substantially different from those of other customers…the difficulty as the voucher service grows: As more consumers use vouchers, voucher-users necessarily come to resemble average consumers so the use of a voucher comes to convey less information about a consumer's valuation. Thus, as voucher services grow, their affiliates will have to rely on voucher advertising rather than voucher price discrimination. Current voucher services' profits and recent growth may therefore not be good predictors of those services' future values.”

The Future of Daily Deals• Merchants– Purveyors of discount vouchers should

focus on forced/advertised awareness• Merchants see value in firms like

AmazonLocal and Groupon because they can make money from sales, yes, but ALSO because people locally that don’t know about those merchants might do so through these deals. The value of the latter outweighs that of the former for the vendor as deal penetration grows.

=Combating Vendor Fatigue– (more later)

The Future of Daily Deals

• Serving Merchants + End Users = Local e-commerce

platform– Doing this effectively implies larger

levels of syndication, meaning elevated profitability for the firms that unlock this basic algorithm.

The Future - Groupon• Andrew Mason, in a

May 8, 2012 letter to shareholders: “things have been rocky” (surely just look at their share price!)…"Although there are risks in moving too fast, companies often don't survive long enough to apologize for moving too slow."

“The next step for Groupon is to become a platform for local commerce.”

-Rob Solomon, CFO, Groupon

The Future - Groupon• MUST combat Vendor Fatigue

– Without vendors, there are no deals. With no deals, there is no Groupon.

– Study from Rice University: 32% of Groupon vendors did not make money through their Groupon offering, and 42% would not do another daily deal• Applying the logic from the HBS paper, it might make more sense

sometimes to induce vendors to offer deals based on the advertising value of leveraging e-platforms for customer acquisition, as opposed to their outright profitability.

• If you market to merchants based on promises of great near term profitability, expectations will cause dissatisfation like we see above. Customers don’t make money in the direct sense from a Google Ads Campaign. Its an expense that provides incredible visibility and engagement. So, too, can offering a discount voucher. This seems undercommunicated.

Groupon’s differentiation• Groupon Now

– Different product offerings with mobile technology and GPS. Real-time daily deal flexiblility for businesses.

– Enabling mobile, repeat, impulse purchases– Customers in North America who use mobile spend

50% more than Grouponers who do not. • Groupon Reward

– Loyalty program to increase customer’s switching costs– Encourage repurchase at the same store to unlock more deals

• Groupon Goods– e-Commerce business channel that will compete with Amazon,

Wal-Mart, BestBuy, etc.– Experimental period

The Future - AmazonLocal• “There’s lots of competitors in this space, and we all want

attention from the merchants. By far and away, they [merchants] answer the phone and want to hear what we have to say. We have relationships with millions of merchants around the world, and 164 million customers worldwide. We know how to work with merchants + connect with customers — it’s unique to Amazon.com.”

– Mark Eamer, Product Director, AmazonLocal

In other words, again, the platform is the thing. Groupon might be the leaders in the space, and competitors like Google Offers might bring interesting technologies to bear in the future. But nobody has the experience in creating a commerce platform like Amazon.

The Future - AmazonLocal– “It’s an interesting thing to think about — the

intersection of consumer products and services that are fulfilled by local merchants. There are some things that are logical that I believe we will discover that we would never have really thought about. This part is very new to us...”

• Mike George, VP, AmazonLocal

New, but not uncharted, as he continues…

– “…We are reasonably new to the deals space, but we aren’t new to the personalization experience. This [recommendation technology] is a logical extension of a competency.”

The Future - AmazonLocal• Leverage Amazon’s e-commerce platform

experience– Existing experience in building a platform via integrating

payment systems, continuing to bringthe ethic of “being the most customer-centric company on Earth” to the table, crowdsourcing reviews, using information to generate AI recommendations (deal preferences initiative), web services, wide offering of everything A-Z (this time, locally), etc => It’s a bit of a new venue for Amazon, but not a new game.

• Amazon’s MAJOR goal for 2012, and beyond = significantly refine its targeting capabilities in order to deliver the right deal to the right person at the right time.

In the End…• …the particular genius of the daily

deals industry is in taking $ spent on the Web, and marrying that to fundamentally local consumption.– The firms that continue to ennoble this

concept on into the future will win. And there are enormous future profits on offer to victors.