Facebook Deals Out-Groups Groupon

... And Living Social and anyone in the deals business, which has, until now been focused on scoring the deepest discounts for individuals. Here's why Facebook Deals inaugurates a new era.

Today marks a turning point in the two-for-one lifestyle. Facebook and its 600 million have entered the Deals game.

When Groupon sprung itself on the world a little over two years ago, it roared in a whole new industry, that of the daily deal. Since then, everyone from fellow behemoth Living Social to niche startups with highly targeted demographics have piled onto the action, hoping to get a piece of this hot new trend.

The fact that Facebook, the 800-pound-gorilla of Palo Alto, has stepped into the game isn't as important as how they've stepped in: in Groups. With sharing. 

Facebook launches their own Deals today. Available in five test cities (Atlanta, Austin, Dallas, San Diego, and San Francisco), Facebook Deals will let its users not only buy deals, but also share deals with friends and see what deals other friends have grabbed for themselves. Not coincidentally, Facebook has just rolled out new bells and whistles in Groups that allow built in questions and polls for group members and share finds with Group members easier. "Say you're on Orbitz and you want to tell your roommates about a great idea for a summer vaction ...," Facebook suggests. Deals isn't mentioned in the Groups announcement. But make no mistake, it's a primary component. 

While Facebook’s program does what other deals programs do—sells deals—Facebook Deals’ emphasis won’t be primarily on delivering the cuttest-rate deal—on the "50%-off t-shirt," as NetworkEffect reported a little while back. Instead, Facebook is emphasizing social experiences, things friends can do together—think: surfing, whitewater kayaking (Zozi, an outdoor adventure company is a partner in Deals), small business retreats, team sports, etc.

That fits with Facebook’s core mission and its core strength: "Giving people the power to share and make the world more open and connected." And if Facebook can do that well, if it can provide its users with another type of value, non-monetary though it might be, that obviates the need for them to compete with other services on the depth of its discounts.

Which, as everyone in this business has started to figure out, is unsustainable in any case. If you offer a "$50 worth of food for $25" coupon, and you pay Groupon half of that remaining $25 (ie: $12.50), then you’ve essentially just paid $37.50 to acquire a customer. Even assuming that customer does come back—and pays full price the next time—that’s a lot of money to acquire a customer. It’s only a matter of time before deals businesses whose models depend on delivering the greatest savings start to crumble, as merchants minding their bottom lines flee elsewhere.

But that doesn’t mean that deals services in and of themselves won’t be viable in the long run. They simply will have to compete on something other than offering deep deep discounts. They could compete on curation, for example—doing the best job of selecting the types of products and services a particular demographic might be interested in, so they don’t have to wade through everything-but-the-kitchen-sink before finding something that appeals. Or, as Facebook Deals is probably going to do, they could compete on peripheral values, like making it easier for friends to see what each other is doing and plan and organize activities together.

[Image: Flickr user Scott the Hobo]

E.B. Boyd is FastCompany.com's Silicon Valley reporter. Twitter. Email.

Read More:
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Google Launches Groupon Competitor, Groupon Poaches Google Exec For COO Job

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  • John Audette

    I just completed a lot of research on Facebook Deals vs. Groupon because at first glance I thought that FB would be a Groupon killer. Following the research, I don't think so. Staying true to their mission (at least for now) FB is focused on social offerings that involve groups of people, as opposed to Groupon's model of offering everything. I published my findings today in the first of a five part series on my blog entitle "All You Every Wanted to Know About Online Couponing". You will find it at the 406 blog - http://tinyurl.com/3ot3y9l

  • cristiano nogueira

    I don´t understand how the title is related to the article... other than the word play on "group"...
    Actually, as the topic changes half way through the article, from Facebook's premiere in the daily deal arena, to the sustainability of daily deals, I am surprised a FC editor allowed this to go up...

  • Kevin O'Connell

    You also have to factor into the cost of the business model all of the existing customers who will jump at the deal. To pay in advance, a consumer likely has to have some knowledge of the product or service. Existing customers are the ones most likely to recognize the value of the deal. A business has to evaluate how much of this business from existing customers is actually incremental and will it increase their frequency over time. In the ROI calculation, you have to assess how many new customers you'll actually attract compared to discounting existing customers.

  • Michael Leander

    I will have to agree with Doug. The cost of acquring a new customer may or may not be cheap. But assuming that retailers deliver a good-to-great service, it is likely that the (new) customer comes back, and equally likely that the referral mechanisms (WOM) comes into play in which case the USD 37,50 paid to acquire one new customer may in fact turn out to be the price of acquring 2,3,4 etc. new customers. And then we haven't mentioned the Customer Lifetime Value yet ..

  • Mitch Drew

    The concept of 'paying people' to acquire them as customers is not new. It dates back to the very first deal ever done on the planet. When a seller said to a buyer "I tell you what I am going to do...I'll give you this if you buy that'. In the past we heard the term 'lost leaders' or 'door crashers'...so the concept of luring customers into a location and giving them incentive to visit is not new...the difference now is the speed at how fast these offers can hit the market and the extra pressure it places on the merchant to 'deliver the goods'. In a 1/2 price $50 gift certificate you are paying a customer $25 to 'acquire' them as a customer. The challenge is if you have a run of customers created by your Group Discount and can't service this 'rush'...you may not be able to offer the best experience.

    There are many exciting marketing and advertising tools available to business owners and the 'Social Coupon' is certainly one of them.

    Mitch Drew

  • Doug Weinfield

    The article fails, because it misses two crucial points: First, somewhere around 20% or more of the coupon buyers never redeem their coupons. That's free money to the businesses, and more than enough to make Groupon's business sustainable.

    Second, the cost to the merchant of acquiring their new customer is their marginal cost, not their foregone profit. Think of it this way: A restaurant that's operating under capacity gets a new customer through groupon, and gives them $50 worth of food for a $25 coupton. That food, and the other costs of delivering it to the customer's table, might be only $25. So the merchant is only out of pocket $12.50.

    I know Fast Company isn't The Economist, but this is pretty obvious stuff.

  • Santiago Darmandrail

    Great story. I have studied the daily deals market in hopes to find a new business opportunity but instead found out that it is a business model that cannot last long. One of the cardinal rules of marketing is "don't start a pricing war" and that is what these guys are doing. Someone (Groupon or Living Social) is going to eventually come out with a better deal than you. Since that's basically all they offer, let's face it, people only go to these companies for the novelty and the price.

    Now I believe that Facebook's Deals can work very well if it is looked at as a more social experience that (why not?) is also a bit cheaper than if you got it elsewhere. But I'll say it again, let's hope they don't come out with 70% savings.