Facebook’s shuttering of its Deals business at the end of August led to a lot of chattering about whether the deals business, as a whole, was doomed. If Facebook couldn’t make a go of it, how could anyone else?
It didn’t help that, just a few days later, Yelp announced it was cutting in half the number of its sales people focused on its own deals product.
But new data from Yipit shows that the deals business is actually growing at a healthy clip. Revenues from the North American market—as well as numbers of deals offered—grew nine percent from July to August. Groupon's own revenue grew 13 percent, to $121 million. Annualized, that makes it a whopping $1.5 billion company.
And a series on conversations with experts in this space uncovered the more important lesson from Facebook’s about-face. Conventional wisdom has held that there are low barriers to entry to this business. But as it turns out, there are in fact many pieces to the puzzle of running a successful deals enterprise, and the key ones aren’t so easy to put together. That’s giving some companies—including Groupon, LivingSocial, and even Amazon—a competitive advantage.
Here’s what we learned:
It’s not about the technology
Sure, the deals business emerged because of technology. It couldn’t have happened without the Internet and social commerce. But while technology was necessary for this space to emerge, it’s not the defining piece of the puzzle—especially since the technology portion has largely become commoditized. "I can buy a clone script for $200 from overseas and have my own deals site up and running by the end of the day," Kris Petersen, founder and CEO of DealsGoRound, a site that lets you resell deals you can’t use, tells Fast Company.
So while Facebook might have been seen to have an advantage in this space because it’s the 800-pound gorilla in Silicon Valley these days, technical chops aren’t actually sufficient to guarantee success.
It is about the people
Success in the deals business means getting good deals—deals that are interesting to consumers and useful for merchants. And that means hitting the pavement. Deals might be a flashy new Web 2.0 industry, but it relies largely on a human sales staff knocking on doors, just as much as any old-school publishing business ever did, like alt weeklies or the Yellow Pages.
And it’s not just about charming merchants with a smile and a persuasive tongue. The best deals companies will be the ones that invest in serious analytics to figure out what kinds of deals work best for which kind of merchants. It’s not a one-size-fits-all, just-give-'em-all-50%-off kind of business. The kinds of deals that work best for salons are going to be different than the ones that work for hot air balloon operators. Which makes the sales staff all the more important: They need to sit down with merchants and walk them through how to structure their deals to get the best results.
Groupon gets that. It has a huge number of boots on the ground. According to its revised S-1 filing, 50% of the company’s 9,625 employees as of June 30, or approximately 4,800, were on the sales team. (For comparison, only 380 people were on the technology team.) LivingSocial's staff numbers aren't public, but it also has said in the past that it is hiring sales people by the boatload.
Even Yelp’s shift reflects that understanding. While it might look like Yelp retrenched, because it reduced the number of people working on deals, James Moran, cofounder and COO of Yipit, sees it differently. He tells Fast Company that the thing to pay attention to is the fact that Yelp took a team of 30 salespeople focused on both deals and local ads and assigned 15 people to focus on deals alone—as a way of ensuring that the deals Yelp gets are high-quality ones.
All of which means that, unless Facebook was willing to build a Groupon-sized deals sales team (which it probably was not), deals on the social network were not a sure thing (a miscalculation we, like others, made earlier this year).
Much was made of the irregular accounting metric Groupon included in its initial S-1 filing: ACSOI, or "adjusted consolidated segment operating income." The metric was attacked for leaving out marketing costs. Groupon, for its part, argued that those were initial outlays in acquiring customers—and would not be ongoing costs (and so should not be used to evaluate the company’s prospects).
As it turns out, those initial outlays are now indeed generating returns. In July, Groupon launched a new travel vertical, Groupon Getaways, in partnership with Expedia. In August, the vertical’s first full month of operation, Groupon Getaways made almost $10 million, according to Yipit. Ten million dollars. In its first full month of operation. Instant revenues of that size, says Moran, were only possible because of the massive subscriber base the company had previously built up.
"They didn’t have to run a campaign to grow subscribers," Moran says. If you were a new company getting into the travel deals space, "you would have difficulty" pulling off a 0-to-60 of that size.
Google and Amazon also have competitive advantages
Big sales staffs and bulging subscriber lists aren’t the only keys to this business. Google and Amazon also have competitive advantages, Moran says.
Google’s big advantage is its insight into your "purchase intent." It knows what you might be in the market for based on what you search for. Google has long used that insight to power its AdWords business and serve up highly relevant ads. Now Google Offers can leverage that same capability to serve up highly relevant deals.
And relevance is going to become increasingly important. There’s a lot of talk of "deal fatigue" among consumers in this space. But consumers aren’t exhausted by saving money. They’re exhausted from having to sift through too many offers they have no interest in. Companies that can fine-tune the decision matrix that determines which deals you see versus which ones I see will have an advantage over the ones that just dump a ream of offers in your inbox, like so much junk mail.
As for Amazon, people are used to buying stuff from it, so it doesn’t have to overcome the trust hurdle that a newcomer does. Add to that the fact that Amazon already has everyone and their grandmother’s credit cards on file and the fact that it’s an expert in making buying things drop-dead simple. Both of those will enable it to reduce friction at checkout time and thereby increase the number of consumers who go through with a deal.
So it’s probably no surprise that, even though Amazon is new to this space (its AmazonLocal product only launched this summer), it’s showing promising signs. Active in only three markets for the full month of August, the business made $1.4 million that month, making it one of the top performing sites on a market-by-market basis, according to Yipit.
Eventually Facebook will come back
Even Facebook has a natural competitive advantage in the deals space: The social graph. Facebook has already shown the power of friends’ word-of-mouth when it comes to advertising. So it’s natural to assume that friends’ recommendations will have the same influence in getting Facebook users to snap up deals.
The problem though, explains Moran, is that, right now, there isn’t yet the necessary critical mass in usage of deals for Facebook to take advantage of the power of the social graph.
"The average subscriber to Groupon only buys two deals a year," Moran says. "You probably have a few hundred friends on Facebook. A portion of those are in [the city where you live]. A portion of those are buying deals. So you’re probably only infrequently seeing a friend buying a deal."
"But it can be a powerful thing," he continues. "That will happen when [at least] 50 percent of your friends buy deals [in general] and at least some of those people are buying deals every day."
All of which means Facebook might have taken its Deals program off the shelf. But it hasn’t necessarily tossed it into the trash. (Facebook wouldn’t comment.)
All of which is to say, there’s one major lesson to take away from Facebook’s (potentially temporary) exit from this space. Says Petersen: "Deals is not just something you can put in your sidebar and expect to have returns like Groupon or LivingSocial."
"It’s too soon to conclude that we can all go home," Moran says. Deals are "going to be transformative to how we buy and sell things locally."
[Image: Flickr user Thespis377, Monty Python and the Holy Grail]