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A field guide to surviving the shakeout in daily deals October 31, 2011

Posted by David Card in Uncategorized.
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Groupon is on its pre-IPO road show, and the daily deals giant still inspires both love and loathing, even though it’s playing down controversial accounting and has cut its losses. Daily deals are the social commerce segment with the highest profile, and the market is overcrowded with hundreds of players. Winners in daily deals will have to achieve scale, mine their troves of data and deliver a collection of marketing services to merchant partners.

The shakeout is under way. Early entrant BuyWithMe had trouble raising money and laid off half its staff. Web traffic data shows Groupon and LivingSocial pulling away from the pack. Is it a two-horse race? Not yet. Even though Facebook scaled back its own daily deals plans, Google is accelerating. Last week Google signed up 14 new deals partners. Most of them are second-tier players, but Google is also working with Gilt Groupe, one of the bigger brand names that has flash sales, daily deals and more-traditional online retail products. (More on each’s prospects for success below.)

Some day, wallets and technologies like NFC for wireless transactions and geofencing for real-time offers will be important social commerce components. But consumer and merchant adoption of these technologies is years away. So even more important than adding new consumer products, right now daily deals players need to focus on the following:

  • Scale. To offer an effective variety of deals, companies need to work with many merchants, and local merchants need the support of a large direct sales force.
  • Data. With user and merchant scale comes enough data for actionable analysis. Then companies can target their offers to increase conversion based on understanding customer buying habits and purchase intent.
  • Marketing services. While national sellers are used to data-driven marketing, local small businesses have little expertise or dedicated staff. Deals companies need to develop simple marketing campaign management tools for them and offer them other marketing services like online display and search ad buying. Such services will lock in merchant loyalty and raise switching costs, dissuading them from using competitors.

Who’s ahead

Groupon clearly has the scale, but it hasn’t proven data expertise. It is more focused on new consumer products than on merchant services. If Groupon is smart, it will invest some of that IPO money in data analysis — it has relatively few employees in technology — and in marketing services for its massive sales force to sell.

LivingSocial’s success is driven more by high-margin offers like tours than on understanding data in support of merchant programs. Amazon, which has an investment in LivingSocial, will add both scale and data expertise to LivingSocial. But so far, while I’m a big Amazon Prime customer, the only targeting I’m seeing from Amazon’s LivingSocial deals is a broad definition of my neighborhood as “downtown New York City.”

Google has the data expertise, the easy-to-use analytics, and the powerful search and advertising networks. It’s a compelling platform for local merchants, but it sells technology, not services. Its network of merchants won’t want to share data or customer relationships, so Google’s potential scale loses effectiveness for them. Google could buy a Yellow Pages company if it wanted a big sales force to “own” those end-user customers.

The potential big three are emerging, but each has flaws. Groupon and LivingSocial have the direct relationships with customers and merchants, but Google has the analytics. To beat the other two, Google needs to migrate from platform to service provider. If it stays a platform, the other two will gain advantage by combining data with services. Meanwhile, there are new entrants: credit card companies with partners and attractive loyalty programs, and an energized AT&T building off its Yellow Pages base. Scores of deals startups will shake out, but big new competitors are just getting started.

Question of the week

Who will be the ultimate winner in daily deals?
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