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Robert Ball

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Growing Pains: Frenzied Daily Deal Market Starts To Mature

Posted: 10/03/11 11:31 AM ET

As predictable as the sun coming up every morning, you knew this would happen. Last year, Groupon was the darling, the fastest growing company ever, according to the Forbes cover story about. Now its IPO is on hold and the pundits are questioning not only the viability and sustainability of its business model but the whole daily deal market. No barriers to entry, no path to profitability, a passing fad, blah, blah, blah.

We've seen this pattern repeated over and over in a multitude of industries: the cool new thing erupts on to the scene and two things happen. First, there's an instant proliferation of "me toos" trying to make money at it. From the late 1890s through around 1930, some 1,800 car manufacturers sprung up in the U.S. In the 1970s and 1980s, thousands of long distance resellers were born. The number of micro-industries that have come and gone in the Internet age is legion, many doing so within just a few years, but all with the same pattern. A new idea emerges, serial entrepreneurs and those with the best access to capital take the lead, and niche players emerge by focusing on their core audiences.

The second thing that happens: the initial frenetic hustle gives way to a shakeout period. Pretenders die. A first-mover or early market leader fails. Others hit an inflection point or run out of capital. Some get gobbled up or just drop out. Critics then jump in to question the entire industry. No path to profitability, no sustainability, destined to fail and the beat goes on.

Often the early leaders survive and prosper. When e-tail behemoth Amazon burst onto the scene in the early 1990s, we heard much of the same chatter we're hearing about Groupon and daily deals today: there was no competition, no profit and no secret sauce. So what did they do? They built a big audience, established a strong, scalable infrastructure and grew a highly profitable business that has expanded in ways no one -- not even Amazon's founders -- could have envisioned.

Other times, early movers falter and better solutions and companies come to life. Search came on big in the late 1990s but Google didn't hit the scene for several years. When they did, it was their business model, not their technology advantage, that changed the world.

And that's where we've arrived today. Groupon, Living Social and a few others have attracted massive consumer audiences. Right behind them, a number of niche players are already emerging to cater to specific audiences, and there will be big winners there as well. Gilt Groupe plays to the luxury market. Lot18 has a corner on the wine business. And my new home, RapidBuyr, is fast-becoming the go-to deal site for small businesses and B2B products and services.

Ultimately, this consolidation and audience segregation is the future of the daily deals industry. We certainly don't need 50 daily deal sites clamoring for the same audience. In fact, the very notion undermines the basic premise of social commerce, that of like-minded individuals publicizing their buying habits and feeding data to retailers who use this knowledge to cultivate selection and serve up relevant offers. No one deal site can be all things to all people. Not to mention that the cost of acquiring new customers keeps going up as competition for these finite audiences mounts from well-known brands with deep pockets.

There's simply no place left -- and frankly no better place to go -- than to burrow into the specialty markets, targeting pockets of hidden potential and building an empire with a specific audience, geography or vertical market. In truth, the niche play not only helps the deal provider reach a more captive audience, but it also alleviates friction for the merchant. Offering a deal is risky business fraught with concerns about losing your shirt and whether the provider can actually sell the deal. The best merchants will naturally gravitate toward deal sites with proven success in their targeted audience. Harness the audience, and you'll have merchants clamoring to get in front of it.

As for the industry in general? I say it's here to stay. I don't know anyone today who is ashamed or even hesitant to present a coupon or ask for a discount. Even if the economy does a 180, it's going to be a long time before anyone stops looking for a deal. Call it social commerce or just refusal to pay full price, but I believe the entire retail process has been transformed into a negotiation, as consumers search and even haggle for the best possible deal, then boast of their deal-hunting prowess.

Something new? Nah...just the bazaars and marketplaces of old, powered by modern technology and innovation. Ironically, as far as we've come with the evolution of online and social commerce, the daily deal model has proven once again that success still comes down to basic marketing principles: know your audience, what makes them tick and find the best way to reach them.

In fact, it seems the daily deal phenomenon has even brought us full circle from the seemingly unlimited potential of global e-commerce to the hyper-local, ultra-personalized feel of a selected-just-for-me shopping experience at your favorite specialty retailer. Beyond that, it becomes a matter of managing for bottom line profitability and cash flow. Basic stuff I know, but go with what works, then rinse and repeat.

 

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