But Rigby says the two entities just don’t gel.
Rigby wouldn’t disclose revenue figures for LivingSocial, or market share, but did suggest that Telsyte’s estimate of 14% is inaccurate. As for the industry’s future, he says it’s not disappearing. But there are too many players to sustain.
“From the outside, I think the appearance is that change is much bigger than it actually is. The press got excited about group buying, and then there was this talk about how it was amazing but wouldn’t last long. Then you have complexities like the Groupon share price.”
“The idea that the industry is going to disappear is absurd.”
Complaints
Billy Tucker says refunds can be a problem for cashflow-strained businesses like group buying sites.
“It’s not uncommon to see 5% of gross revenue paid out through returns. If you’re taking 50% net margin and you see 5% gross revenue paid out through refunds, that’s kind of sustainable.”
“But if you’re only taking 20-25% as a margin, suddenly it’s not. That’s a huge amount of refunds.”
Scoopon uses the entry of American companies to the market as framework for its own branding story: the “little Aussie battler” going up against the big guys. But, the truth is, Scoopon is the second biggest group buying company in Australia. And general manager Jared Baker says that’s because of a focus on sustainability, not just revenue or profit in isolation.
“It’s not about profitability, although we are massively profitable. Profit is just the outcome you get of doing your business well.”
“If you’re only focused on revenue, you’re not incentivised to have a healthy bottom line. You’re making different decisions for your customers than you would in the long term.”
Plenty of customers have expressed problems with local group buying sites. Regulators have received more and more complaints over the past two years.
But perhaps the biggest shift has been in the deals themselves. Originally littered with discounts on beauty treatments and restaurants, companies are now offering more product-related deals.
But the companies say this is a downside. Sam Yip says product deals can hurt the bottom line.
“These businesses cannot have a healthy bottom line if you’re just throwing money at things like product deals and repeat deals. It stops getting a good result for the merchant,” he says.
Merchants take big hits on margins for product-based deals. Service deals, on the other hand, can generate money.
A bigger problem still is when products end up being dodgy. The SoSharp scandal earlier this year saw the company incur a six-figure refund bill after its KitchenAid deal went bust – the mixers were faulty.
“Customers can smell a rat,” Billy Tucker says. “I look at half a dozen products and can see which ones are just not good.”
Merchandise kings Catch of the Day have recognised that travel-based deals are the key to success, rather than product-based offers. It’s even secured a travel agency licence to offer more of these deals.
“There’s less hesitation now to spend a lot of money on these deals,” says Baker. “We’re seeing higher average spends, and that’s to do with customer confidence in these types of deals.”
“The reason we got a travel licence is so that people have that confidence. They know that if we were to go bust, which would never happen, they’re defended by Australian law. It gives security about these $3,000 to $4,000 deals.”
The future
The group buying game is one of scale. Businesses that have already spent enough money to control double-digit market share are likely to stay there – but only if they can hold customer loyalty.
Billy Tucker notes Scoopon is likeliest to succeed in the long term, noting its connection to the Catch group. Outside investors help too.
Adam Schwab says it’s media-owned companies, Cudo, Spreets and OurDeal, that will struggle. With limited market share, they will need to work harder to gain more loyalty.
“In the next 12 months, we’re going to see less and less of the traditional awareness marketing and, instead, [more] building loyalty.”
Scoopon’s Jared Baker says much the same, arguing customer care is vital in a limited growth market.
“In the last year, we’ve invested much more in customer care than in marketing.”
Group buying isn’t going away. It’s worth $500 million and continues to grow. But as Billy Tucker points out, we’re only now seeing the consequences of its dramatic, early success.
“These websites need to slow down the amount of information, reduce the number of deals, and then focus on the no-brainer deals that everyone is going to like. That was the original intention.”
“There’s a market here. There’s $100 million in profit for the winners, but it has to evolve.”
This article was first published on LeadingCompany’s sister site, SmartCompany.
