Group buying sites mature as huge market size becomes clear

As the packed-to-the-brim shopping malls on Boxing Day promise to remind us this weekend, shoppers love a bargain. That’s the crux of what’s inspired the many sites looking to cash in on the biggest trend in online commerce over 2011; the group buying craze.

If you haven’t heard of it yet, the concept is simple – a Web site promotes a heavily discounted item from a local business that requires a minimum number of people agree to make the purchase. Once that minimum threshold is met (these days, it almost always is) the deal is unlocked and more shoppers can buy the discounted price or service for a brief period of time. The merchant promoting the deal shares the revenue generated with the group buying site, the end goal being to attract some new customers in exchange for taking a loss on the sales made.

The leader in this burgeoning e-commerce space is Groupon, a Chicago-based site owned by ThePoint Inc. Founded in 2008 and launching in Canadian cities in 2009, Groupon had been estimated to make $350 million in revenue over 2010. Yet the company was attractive enough to elicit a rumoured U.S. $6 billion acquisition offer from Google in November, ultimately turning down the search giant.

That type of money may not have been enough to entice Groupon, but it has inspired many copycat businesses that would be happy to tap just a fraction of the group buying market. Toronto alone is home to two group buying startups and another startup that aggregates group buying deals into one place, allowing bargain-hunters a one-stop shop to see discounts from more than 50 sites. All the while, local small business owners have more options than ever for ways to get new customers in the door.

Related Video: Group buying catches on in Canada

As the group buying phenomenon enters 2011 red hot, the industry is entering a maturation phase. Companies are looking for the edge in a marketplace that Groupon president Rob Solomon estimates to be worth “literally hundreds of billions of dollars, if not trillions of dollars on a global basis.” Sites will soon offer greater social intelligence to make discounts offered more personalized to users, and some sites will likely not survive as the market consolidates.

“There’s probably a few thousand clones or copycats that are trying to do the same thing,” Solomon says of his competition. “There’s going to be some consolidation over the next year or two, the market just can’t support all of these startups… we’re very well positioned to be that big player.”

Groupon is approaching 2 million subscribers in Canada and expects to pass 100 million subscribers worldwide in 2011. Located in 122 different markets across 35 countries, Groupon is currently offering more than 650 different deals every day.

Startups like Toronto-based TeamBuy.ca want a piece of that pie. Launched Oct. 2009, the site now has almost 100,000 users in Toronto and placed in 12 markets across Canada, president and co-founder Edward Yao is confident his path to success will be laid by offering merchants measurable success based on their promotions.

“This is a young industry by all means,” he says. “You need large mass, you need customer service and you need a sales force to bring on new merchants.

Yao says the online version of group buying is inspired by a real-world Chinese phenomenon he witnessed first-hand when visiting his mother there. In that version, people literally crowd into a retailer’s store and demand to be given a discount on a product – or else they won’t leave. It’s a reminder that a huge majority of commerce in the world is still offline – and group buying offers a new window for merchants into e-commerce.

E-commerce accounts for just six per cent of all commerce, Solomon says. That’s because online retailers miss out on the habitual spending people usually engage in – spending money on businesses close to where they live and work. It’s those small grocers, gyms and coffee shops that Solomon and other group buying sites hope to bring to the digital market.

Who lives to offer discounts another day will depend on who can attract the most users, says Antonio Rodriguez, co-founder and CEO of OneSpout. His Toronto-based startup site aggregates deals from Groupon, TeamBuy, LivingSocial, WagJag, and more into one central listing board.

“What we’re trying to do is take the current evolution of where this business is to the next level and going from a model of you signing up for a site and getting that one daily deal and getting deals that are arbitrary, and create an experience that is more suited to what the consumer would want,” Rodriguez explains. “Personalization has been the trend that Groupon has been pushing and we’re pushing.”

Group buying sites usually feature one deal per day per market, he says. This is done not for lack on inventory, but to better feature the merchant offering the discount. Yet a deal for a pedicure at a spa might not appeal to all users of a discount service, so OneSpout helps users find deals they are more likely to be interested in.

“They want to get a higher margin deal,” Rodriguez says of group buying sites. “When they do a deal, they want it going as the feature deal to all their subscribers and that’s how they end up getting a higher margin of the actual sale price.”  

OneSpout just launched in October of this year and has a five-figure number of users from across Canada, Rodriguez says. The site is being paid by group buying sites to feature their deals.

While some deals may not be suited for everyone, Groupon tries to encourage its users to try new things and use the site as a city guide. Still, Solomon recognizes that most men probably won’t be signing up for a pedicure, no matter how steep the discount. That’s why the site is focusing more on personalization.

“We’re trying to personalize our database so you get a different deal than your wife, or your friend across town,” he says. “We want to deliver that Burlington knitting deal to those who live in the area and like knitting.”

Demographics and geography will make up most of the personalization equation, but shared interests could also play a role, Solomon says. Groupon currently offers Facebook Connect integration and information from the social graph could be pulled for better deal-matching intelligence. Similar to shopping on Amazon, a user’s purchase history could also be used to guess what they’re likely to buy next.

For merchants, group buying does for local advertising what Google did for search engine advertising, says Chris Nguyen, CEO of TeamSave LLC. It offers measurable results and extracts no cost until there’s a measurable impact, and a user agrees to purchase a discount. The business model was given a stamp of approval when Groupon received that acquisition offer from Google.

“It solidified that social buying is the future of online commerce,” he says. “For Groupon to turn it down, they realized they were sitting on something that’s worth more than $6 billion.”

TeamSave is another Toronto-based startup, spinning out from Ryerson University’s Digital Media Zone incubator space. Its group-buying platform has also drawn a five-figure number of users from across Canada, Nguyen says. For 2011 the site sees white-labelling its technology as a cornerstone of its revenue. The firm recently signed a deal to power Kijiji’s Daily Deals site.

“Because there is only one deal a day, there is so much inventory to run, especially in Toronto,” he says. “We don’t have to compete directly against companies like Kijiji.”

Kijiji attracts 9 million Canadian visitors a month to its online classifieds, and wants to cash in on selling discounted products to those visitors. Other media entities with large audiences have also thrown their hats into the group buying ring. Torstar Inc. (owner of The Toronto Star and Metroland community newspapers) owns Wagjag, and Postmedia Network Inc. owns SwarmJam.

But those user bases won’t out-compete Groupon, says Solomon.

“Doing this at scale and being effective is very difficult,” he says. “Most of these companies can dabble at it, but being effective and efficient and moving volumes of them is different.”

Companies would have to hire thousands of employees to match Groupon’s level of scale, he adds. Solomon expects to capture the lion’s share of the “daily deal” market.

Most industry insiders expect there will be a consolidation of group buying sites within the next year or so.

“We’re probably going to see a shake out on some of these sites,” OneSpout’s Rodriguez predicts. “There’s way too many of these deal sites in Canada.”

Likely to go down first are the small regional players that focus on only one market, he says. But also expect to see more group buying sites that cater to specific verticals, such as restaurants and spas.

Groupon’s expansion is also assured next year. Forbes called it the “fastest growing company ever”, and the numbers support that notion. It’s gone from 124 employees a year ago to 3,100 employees. Its user base a year ago was 1.7 million subscribers, and it is now at more than 44 million.

All proof that people love a bargain.

Brian Jackson is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and check out the IT Business Facebook Page.

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