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Grouponisation and the race to the bottom

Are daily deal sites the lower common denominator of commerce?

While a crowded market of daily deal sites snatch frantically for a share of the pie – with some, like Cudo, apparently running on borrowed time – a new player is looking to cook its own goodies. Hazel Phillips follows the fortunes and foes of the daily deal grabfest.

Daily deal site mastermind Shane Bradley doesn’t seem like the violent type; he has no obvious tattoos or madly bulging steroid-induced biceps, and he’s more in the habit of smiling good-naturedly than baring his teeth at you in anger. But there’s one aspect of the daily deal site industry that incites him to the brink of physical violence: competitor Groupon’s reputed hard-and-fast practice of demanding 50 percent commission from their business partners. It’s a practice that’s “just insane”, says Bradley.

“To be honest, if anyone came and asked me for 50 percent commission, if I was running the business, I’d punch them in the face,” he says.

“It’s just stupid. If they think they can get that down to Kiwi businesses, they’ve got another think coming.”

Brave words. Bradley, who’s in the throes of his third joint venture with media giant APN, is sitting in a pretty position to be able to say such things. He’s now got 65 percent market share after launching GrabOne – modeled on Groupon’s international site – in July last year. Groupon, meanwhile, is scrambling to catch up, while TradeMe’s site TreatMe cleans up the dregs of the market with 12 percent share.

The others – LivingSocial, Cudo, Groupy, and a plethora of other frivolously named websites – are left eating dust. Bradley’s potential for violence over excessive commission is moot, but he does think the sector is at the tipping point of a shakedown, with too many players and not enough ball.

“People will start shutting down. There’ll be a number one, a number two, and there won’t be anything else. That’s how it’ll play out.”

A great deal of Bradley’s confidence in GrabOne’s market dominance stems from a huge staff, sales and support team. The site runs a helpline from 7am until 10pm, seven days a week, for confused customers – such as a punter who couldn’t find the restaurant, so he called GrabOne for directions. True story. Bradley reckons the helpdesk will be a trump card in the game.

“People will stop buying stuff there because they don’t have the support.”

There’s a slogan emblazoned on the wall of the company’s Newmarket headquarters: Best deals, best site, best service, best people. Bradley says he’s a firm believer that if you do things to the best of your ability, things will eventually work out: “If you solely look after that stuff, the business will take care of itself.” GrabOne, he says, has laughed in the teeth of the gale over the past year, even in the face of a new competitor entering the market every five minutes. It’s now one out of 15 players but its market share hasn’t changed, and he’s quick to dismiss his competitors.

“You’ll find the ones that are slightly less scrupulous will fall off the bandwagon. They’ll turn the site off because they discover they just can’t compete.”

At time of publication, GrabOne has 14 people in its development team building new features for the site, all destined to go live before Christmas. The next step (not just for GrabOne, but globally) is an iPhone app that will use GPS to make deal offers to consumers in real time and depending on where they are and what they want. Google is chasing the same offering overseas, while mobile phone manufacturers are looking more closely at near field communication (NFC) chips for mobile payment possibilities.

“Google’s having a war with everyone, and everyone’s chasing the same thing,” says Bradley. “We can all do NFC ourselves. Google’s up against Groupon in the US, which has 7,000 staff, and you can’t just go hire 7,000 staff to do it.

“It’s a bit like when I was involved in finda.co.nz, and everyone said Google was going to come and kill my business. I said, I’m pretty sure Google’s not going to come down and hire two reps to service the Tauranga region.”

The rebirth of Flossie.com

Shane Bradley won’t be punching Jenene Freer in the face any time soon; the entrepreneur’s new foray into daily deal sites won’t be charging commission at all, but will instead be fee-based. Bradley’s ire need not apply.

Freer has never been afraid of a little competition. She’s also no stranger to tough times. In August 2008 she launched Flossie.com, an online portal for a range of female-centric content, and later rolled it out in Australia. Angel investors Lloyd Morrison and Phil McCaw of Movac threw $1.25 million at the project. Ironically, APN followed in Flossie’s footsteps with its Fabulous.co.nz portal (now defunct). In May last year Flossie merged with Digital Dialogue and the portal was no more. However the demise – Freer prefers the term ‘evolvement’ – of Flossie.com hasn’t deterred her from bringing it back in another guise.

Flossie.com has reemerged – with its old branding and aesthetic – reborn as a daily deal site. The launch offer involves cosmetic surgery (breast enhancement or reduction, an eye lift and Botox) from a clinic in Tauranga.

It’s a deal site with a difference, naturally. Freer describes Flossie 2.0 as a “vanity club” where members will get hot deals on hair, beauty, and cosmetic treatments. Rather than opening up the doors of salons to the common ruck to hog the prime-time appointments, Flossie will focus on ‘quiet day’ appointments to fill down time. It’ll also feature a directory with social media rankings, plus a loyalty programme to try to counteract the discount mentality that deal sites engender.

“The grab-fest mentality desperately needs to evolve,” Freer says. “A single hair salon in the suburbs shouldn’t be selling 400 appointments at 58 percent off on a deal site and be able to redeem the voucher on any day of the week. They also can’t service an additional 400 appointments in just six weeks – the typical validity duration – and they certainly can’t cope with that many people calling to book in.”

Turning deals into loyal customers is the holy grail. Freer believes salons don’t have the resources to commit to marketing, or to convert a trial to a loving relationship, and that’s the problem she wants Flossie.com to solve. And rather than forking out a commission to Flossie for every customer through the door, they’ll be charged a listing fee, which comes with all the search and social media they can eat.

“We don’t want to participate in the race to zero that’s going with some of the deal sites on commission rates, so we’re opting out of that part,” Freer says. “In the broad, non-category specific market end, only a few players will be able to survive. The model simply doesn’t produce a high enough margin to warrant the time required to get business owners on board and consumers buying. Sites are going to be fighting each other on their commissions, and eventually it will just become too hard for a small player to exist on a 10 percent commission rate.”

Instead, Flossie will rely on a significant secondary revenue stream – a directory and appointment calendar – to sustain it. A major issue with deal sites is securing appointments, so it will ultimately include an online booking system. According to their research, less than 3 percent of salons offer online booking, but 66 percent of women would book online if the service were available. Freer hopes to have Flossie’s beta version up and running by the end of the year.

“Every step of the way we have come back to ‘what is the pain that we need to fix’ and zeroed in on that,” Freer says.

“Our overall strategy is to make beauty more achievable to more women and create a seamless platform for booking treatments. However, we’re aware that the business owners are just not ready to go down this path. With a bit of time and trust, we feel confident that we can do for this industry what wotif.com has done for accommodation.

“The installed software packages currently on offer in salons are slowly moving themselves into the cloud and with this we’ll see more opportunity to integrate and make booking from your mobile phone incredibly easy.”

It’s a hard row to hoe. Call it tall poppy syndrome, call it professional jealousy – when Freer launched Flossie in 2008, you could practically hear the sound of industry knives being sharpened. But Flossie 1.0 can’t compare to the new incarnation. It’s a different business, with different shareholders and directors. There’s a different revenue model and consumer offer. Freer, along with partners Ellen Cadzow and Steven Torrance, have been working on the concept for a year already. The brand and domain name Flossie.com – owned by Flossie Media Group and sold to Actual Dialogue – disappeared when the business moved away from being a consumer-facing ad network. Admittedly, there’s the 95,000-strong nzgirl.co.nz network – in which Freer is still a shareholder – to lean on. There’s no investment, to speak of. The partners in the new company, Flossie.com Limited (Cadzow and Freer are joint shareholders and directors, while Torrance is a partner in Actual Dialogue) are caning their way through a six-month ‘proof of concept’ stage to prove the business has legs. They’ve mapped out performance criteria that have to be met before the next phase, an approach Freer says shows “business maturity that I may have otherwise lacked a few years back”. They’ll make a decision in six months whether to bring in investors or continue to self-fund.

“The third phase project name is Ben Hur – if that gives you any indication of the sheer size of it!”

Bad for business

Other daily deal sites could do well to take a leaf out of Freer’s book and search for the pain that needs – desperately, in some cases – to be fixed. For every happy customer indulging in teeth whitening and hair extensions, there’s a disgruntled one – with plenty of willing sympathisers. Key problems include securing a booking within a limited time period; service providers who are apathetic to your cause, as they’ve already pocketed your dollar; and seemingly neverending lists of terms and conditions that make voucher redemption challenging, if not impossible. Issues from the business side of the fence likewise abound; Bob Phibbs’ details a litany of business horror stories in his book Groupon: Why Deep Discounts Are Bad For Business.

Ant Gardiner is one such disgruntled daily deal user, after three failed attempts to redeem a GrabOne voucher for Macs Brewbar in Takapuna. His experience reads like a how-not-to of customer service. Gardiner had bought two vouchers under his own name, although one was a gift (GrabOne didn’t have the facility to enter two names), and redeeming two at once is a no-no. His second attempt was thwarted because the voucher was for food and drinks, but Gardiner hadn’t ordered food. “That was frustrating, but I could forgive them.”

Three strikes and you’re out: the third time, Gardiner informed the waitress he wanted to use the voucher, but when he went to pay, the same waitress declined him as he’d ordered from the specials board. Nor could he use it for his friend’s food, as the voucher wasn’t transferable. Gardiner says he can now “kind of” see their point, but after three elaborate reasons for non-redemption – “and having the manager completely shoot me down” – he gave up and used the internet to vent his frustrations. Gardiner later attempted to auction the voucher for 50 cents on TradeMe, along with an “angry rant” about the bar. The auction went viral, garnered thousands of hits and dozens of comments, and TradeMe promptly pulled it.

Gardiner is quick to defend GrabOne as the provider, saying there wasn’t anything the site should’ve done differently. Bradley takes unhappy customers seriously and is quick to offer refunds and absorb the cost. The site is selling about 45,000 coupons a week, with some $6.5 million gross revenue a month – and unhappy ‘Grabbies’ are a tiny percentage of the overall scheme of things. 

“You’re kidding yourself if you think you’re going to have 45,000 brilliant coupons every week,” Bradley says. “From a business point of view, we spend a lot of time educating the merchants, because we know from past experience with other deals what will happen.”

When good deals go bad

But there’s no accounting for stupidity. On June 9, Ruapehu Alpine Lifts (RAL), which operates the Whakapapa and Turoa skifields, teamed up with Tourism New Zealand (TNZ) to promote $1 ski passes via the Australian portal of LivingSocial.com. A one-day Ruapehu ski pass costs $95, rendering the discount mind-bending. The idea was to entice Aussies to come ski in New Zealand and leave their money here (for every dollar spent by a visitor to the mountain, 42 cents of income is generated for the local economy). Nearly 19,000 vouchers were sold in less than three hours, with 800 New Zealanders getting in on the deal. The discounting was absorbed by RAL – Tourism New Zealand didn’t shell out so much as a cent to subsidise the passes. Anyone with a rudimentary grasp of Year 2 maths can figure out the deal represents some $1.9 million in lost potential revenue to RAL. Ouchies.

Ruapehu Alpine Lifts general manager Dave Mazey admitted the deal turned into a marketing nightmare. With a limit of eight passes each, about 6,000 were bought by users with New Zealand email addresses; and that’s not even accounting for those using gmail and hotmail. Moreover, there’s no way to know how many passes will actually be used by Australians visiting New Zealand, and hence what the economic impact will be for tourism spending in the region.

Idealog sent Tourism New Zealand a series of questions about the ski pass deal under the Official Information Act. Unsurprisingly, a substantial portion of information was withheld due to “commercial sensitivity” and its potential to “unreasonably prejudice the commercial position of Tourism New Zealand or third parties referred to”.

According to correspondence provided – with large chunks censored – the initial quantity for the $1 passes was floated to be 100, a far cry from the 20,000 sold. A comment in the correspondence from TNZ marketing staffer Tim Keeling is redolent of the current marketing mindset: “Significant reach for potentially little to no $ investment – nice.” Certainly, no investment for TNZ. Nice indeed.

On June 9, Keeling emailed livingsocial.com national sales executive Rebecca Stevens to request that the number of passes be capped, due to the absence of terms and conditions restricting the offer to Australian residents. Correspondence shows TNZ clearly assumed that the offer was open to Australians only.

“We’ve already gained some key learnings and well exceeded the estimates of exposure below – specifically … the need to keep conditions tight.”

Keeling requested confirmation that the offer in question had been capped “at or as close to the 10,000 as possible”. Half an hour later he emailed again: “We need it capped immediately as it is going viral with NZ residents currently due to the lack of conditions”. At 5.30 that evening, TNZ and RAL were busy concocting a press release to assure the “800 cheeky Kiwis” who scored vouchers that they would be honoured. The PR guff included a selection of choice rent-a-quotes from RAL and TNZ about the deal going “absolutely gangbusters” and “the power of online media”. Behind the scenes, the wheels were spinning frantically over the uncapped deal. The next day TNZ general manager, public affairs Suzanne Carter managed to paint the barn door a cheery shade of red in spite of a “negative story” by TV3, which was asking the question everyone wanted an answer to: did TNZ fund the passes?

“They seem to want to find a negative to this!” Carter wrote of the media coverage. “Our expectations of 2,000-odd were exceeded amazingly – there is no doubt learnings on this however I will leave that with you and Ruapehu to work through in relation to anything future my interest is this one (ie capping/reach expectations).” [sic]

While TNZ and RAL were busy faux-cheerleading over the promo-gone-wild, Ruapehu loyalists weren’t so chuffed. RAL’s Facebook page made for sour reading as snow regulars made their feelings clear on being pipped at the post for some penny pinching.

After all, legions of Kiwis support RAL every year by shelling out for a season pass – well before the first snowfalls or any indication of what the season will be like – and many found it to be a slap in the face.

Southern ski operator NZSki, which runs Coronet Peak and the Remarkables, scoffed at the $1 passes. Marketing boss Craig Douglas said the southern ski product was pretty good value as it stood, and offering huge discounts had the potential to confuse people about the great value a New Zealand ski holiday represented for Australians.

Bradley doesn’t pull any punches when it comes to $1 deals: “They’re not sustainable. Two years ago they might’ve been unique.

“But now people look and go, sweet, I’ll buy a dollar deal and I won’t be in touch tomorrow, and it’s about what happens the week after, the month after, and two months after that. There’s actually more brand damage done to it. It’s just crazy. They would have blown six figures in a day, and Living Social’s market share is the same as it was before that snow deal.”

Discount mentality

And so, to the future of daily deal sites. Rice University in the US recently produced some damning research claiming that sites will have to settle for lower shares of revenues compared to their current levels, and that it will be harder and more expensive for them to find good candidates to fill the pipeline of daily deals. The study, which looked at 324 businesses that undertook a daily deal promotion, found that 21.7 percent of customers never redeem the vouchers they’ve paid for; 26.6 percent of businesses lost money and 17.9 percent broke even; very few users returned to purchase at full price; and 19.8 percent of businesses wouldn’t do another promotion.

Associate professor of management Utpal Dholakia said the findings uncovered a number of “red flags” around the industry, and were “symptomatic of a structural weakness in the model”.

Common sense will tell you these sites create a discount mentality; just look at the likes of Kathmandu or Briscoes, which are devoid of customers when they’re not having a sale.

New research claims consumers are becoming immune to sales and discounts, while retailers are getting pessimistic in the face of ‘sales fatigue’. Still, it’s highly likely these sites are here to stay.

“The deal market isn’t going away – a demand will exist for as long as people have choice over what they can buy,” Freer says.

“It’s hard to compare the new deal model to the old – it has completely transformed. But consumers are going to become cautious in what they buy.  

“There’s a frightening volume of vouchers not being redeemed before expiry – and while that’s mostly the consumers’ apathy, we’ve heard numerous stories of this being sold to the business owners as a compelling reason to participate – money for nothing, essentially. And I think that’s a fairly short-sighted selling point.”

Bradley – predictably – concurs.

“As long as there are customers who want deals, we’ve got a business.”