What's the deal with the Group Deal sites?

A lot of group buying sites have suddenly mushroomed in India recently in what seems to be a Me-Too aping of the Groupon model. And (with all due respect), some haven’t even bothered changing UI elements while going about it (Check out the Buy button on Snapdeal and compare it with Groupon).

It’s interesting to note what exactly seems to be working for Groupon here to have suddenly shot to a company valued in excess of $1 Billion in record time.

1. Very clear and focused pitch to the user: The pitch to the users is very clear and simple and actually translates into a clutter-free page as well. The home page talks only about the deal of the day. The workings of the deal are simple to understand. It’s not a site that has something for everyone every day of the year but that’s exactly what works for it.
2. Performance-based advertising: As has been the case with earlier coupon models (not just group bargaining), the business pays for actual footfalls which is always better than spending money on a CPM campaign without any guarantee on improvement in business.
3. Network Effect: Sounds like jargon but that’s what works here. A network where adding more users generates value for me has the potential to scale virally and that is exactly what works for group bargaining because a deal goes live only when a minimum number bid for it. Hence, adding more users is that much more valuable to me and I would, hence, want to notify others for whom the deal would be relevant.
4. Business model with low upfront cost and revenues as you go: Unlike so many web businesses out there, this is clearly not one that needs to build a sticky user base and get a ton of data before it can start monetizing. While it caters to the same group of end users, it doesn’t suffer from the initial investment problems that plague a local search model. The product isn’t technologically intensive either and just needs a dedicated sales team bringing deals in steadily.  All these points make it especially attractive for a low-capital startup.
5. Beneficial for both sides of the network: the businesses as well as the users: The theory of a two-sided network states that growth in users on one side spurs growth in users on the other. While Groupon is not exactly a network in the obvious sense, the growth in users on both sides directly impacts the business. More customers translates to more deals going live and more businesses translates to more deal types and hence more customers. Most importantly, both sides see value. The business gets those additional footfalls and the customers get a level of discount that they would not get in regular deals and sales.

In addition to this, the model is also financially sound a group bargaining sites typically buy inventory with businesses upfront and sell it but pay the businesses only after the fulfillment. The model ensures that in the long run, they will always have extra cash.

While this clearly shows that the model, although very simple, is very effective, it remains to be seen whether any of the current players in India will really see the uptake that Groupon has seen in the US. A few matters of concern in the Indian context are as follows:

1. Awareness of performance-based advertising among businesses: Indian SMBs are nowhere near their US counterparts in terms of online adoption and performance-based advertising models are not very common. One may argue that you don’t really need a whole network of SMBs to for this to work (unlike Local Search) but you definitely need to have a steady flow of deals to make this a sustainable business. There is hope in the success of Justdial and a good sales team may still get the business coming in.
2. Openness of businesses to adopt the model and range of deals: Openness to adoption among Indian businesses remains to be seen. So far,  the deals that one sees on these sites are largely from 3 categories:
a. Weekend sports and events: An obvious candidate, since you need critical mass for the event to take off. Group bargaining works perfectly for this segment since it ensures that the critical mass to enable a trip is met with group buying.
b. Spas and salons: In a crowded market, new and unknown spas and salons typically drive traffic by offering discounts. This model works well as they get guaranteed traffic with the discount.
c. Dining out: This is hopefully a category that will spur the growth of group buying simply because of the abundance of restaurants. So far, most of the advertisers are either new restaurants or restaurants that have suffered a loss of footfalls recently. E.g. restaurants in Whitefield, Bangalore or restaurants like Sue’s Place, Bangalore which has seen a downturn in business after the metro construction started.
A larger variety of deals is critical to growing the consumer base and is probably as good as your sales force.
3. Ongoing stream of deals: While Groupon has a daily deal on the site, most Indian sites have deals live for several days. It’s unclear whether this is because of a lack of deals or because of a lack of consumers to make a deal live on day 1 itself.

It’s interesting to see so many startups mushrooming in this space but it remains to be seen which one (if at all) will stay on to see the kind of success that Groupon has seen.