The group buying collapse is coming

Group buying. Daily deals. Social commerce. Call it what you will, but the sheer number of blatant knock-offs that have sprung up in global markets following the “success” of Groupon and LivingSocial should give you a hint that all is not well.

A fair number of these startups are nothing more than two or three people, a few laptops, an internet connection and phone line. They’re strangely reminiscent of those outfits that sold small businesses those five-page microsites a decade ago. Small businesses got ripped off with websites based on cookie-cutter templates. Users/customers got ripped off because they actually couldn’t find what they were looking for.

Simply put, the problem with group buying sites is the model.

For example, a good or service worth US$28 is sold on promotion. The daily deal/group buying site drives a hard bargain and wants a 40-60 percent discount on that price. This means the business ends up providing that good/service for, say, half price. The deal site wants its margin too — around 25 percent. This can be dressed up and labelled as almost anything. They’re putting buyers in touch with sellers. This means that for something with a normal retail price of US$30 will net the business just US$7.

• Retail price – US$28
• Discount – US$14 (= US$14 deal price)
• Payment to business – US$7
• Deal site service fee – US$7

Imagine taking a 75 percent (or even 60 percent) knock on every item you sell in a deal. Even after taking into account mark-up, it simply doesn’t make sense.

A deeply discounted deal is not sustainable, not for the business providing the deal. When these willing businesses dry up, so too will the daily deal sites.

This doesn’t even take into account potential fraud or the payment issues. That’s on the business side of things.

For users, these sites have become nothing but aggressive email address harvesters. Some won’t even let you see a deal before registering with your email account. The more email addresses they have, the more attractive they’ll be to businesses who are thinking of offering a deal. Plus, they need to keep their user bases growing to make sure that email open rates, clickthrough rates and conversion rates remain favourable.

Daily deal sites are spending unbelievable amounts of money to acquire users. Some of the larger deal sites in emerging economies are spending tens of millions of dollars a year on Google AdWords.

The relentless pursuit of growing subscribers (and potential businesses to “sell” a deal to) explains why the bigger sites are expanding to questionable markets in small, out of the way, towns.

Some of the emerging market operators, however, have hit the jackpot. Two pertinent examples of companies which have done so come out of South Africa. Groupon purchased Twangoo in January and UbuntuDeal was bought by auction site bidorbuy in April.

Media outlets are getting in on the action too. Press titan Avusa has launched Zappon, advertising its “access to 2 million readers”. Naspers has launched Dealify through its MIH Internet Africa division, after the media giant was beaten to Twangoo by Groupon.

Oh yes, and Facebook Deals and Google Offers have turned their sights to other international markets.

One or two more owners of the existing sites may yet hit pay dirt, but it remains an incredibly splintered market.

Add in the fast-diminishing base of businesses who are willing to discount goods and services and you suddenly realise why nearly every single one of these daily deal sites is littered with beauty spa treatments, dance classes and weekends away at non-descript lodges in places you’ve never heard of.