What you need to know about Singapore's daily deals sites

In recent months there has been much speculation about the long term viability of daily deal sites (also called group buying sites) like Groupon. Group buying has long been a popular means for consumers to pool cash together and create greater bargaining power. According to Needham & Company LLC, by 2015, the daily deals market will generate US$10.3bn revenue per year globally.

Since Groupon began two years ago, 600 new deal sites have launched globally. Singapore has at least 10 prominent local daily deal sites, with 7 appearing in the top 500 most popular sites in Singapore.

Despite the popularity of daily deal sites, there are question marks over the business models sustainability. Like for instance the high cost of marketing associated with reaching consumers everyday with fresh deals, and the low barriers to entry to new competitors.

High cost of marketing
The daily deal model requires an intense amount of display advertising and email campaigns. Any startup company today that requires enormous amounts of cash to convince customers to buy their products or services is in trouble.Marketing alone will not make a product or service sticky. Google and Apple have proven that marketing dollars is the least important criterion when acquiring customers.

Low barriers to entry
Daily deal sites like Groupon add little value other than to offer a deal, which can easily be replicated. Currently Groupon has no IP or differentiation from which the company can defend against invading competitors. Even its method of marketing using email and display advertising is outdated. The 50% discount claim has already been replicated by many deal sites, which means unless players in the industry differentiate quickly, a price war will ensue. The strategy seems to be to become the first in as many markets as possible, which explains why Groupon have been on an acquisition spree – buying businesses to expand their footprint rapidly in new markets like Indonesia.

No loyalty for retailers
If you have ever run a food and beverage outlet, you will know one night of understaffing and bad service can kill the reputation of the business. That’s what can happen when you have flash mobs – a surge of customers who appear en-masse driven by a promotion. Restaurants have a fixed capacity of tables, and are easily swamped, causing patrons to experience service delays and loyal customers to stand and queue for a table.
What’s worse, ‘deal-hungry’ customers can be detected by ‘full-paying’ customers. Loyal customers can sense what is happening in the restaurant. This experience is likely to tarnish the brand’s reputation and deter loyal customers from returning.

Groupon’s model also takes a hefty share of the profits. Groupon pass a 50% discount to the consumer, and then take 50% of the remaining amount. So if a bowl of soup retails for $10, the retailer is left with $2.50 – well below break-even.

At the end of the night when you tally the damage to the brand and the financial losses, you have to question whether the exercise was worthwhile. Is this really the type of customer food and beverage retailers want in their stalls?

Location-based deal apps like Chalkboard at least differentiate by only displaying deals which can be redeemed in close proximity to a customer. Customers are driven to the store for reasons other than a one-time promotion. Location-based deals therefore build better customer loyalty to retailers by positioning the retailer as relevant and convenient.To date, Groupon blindly serve deals based on consumer preference.

Qualify the customer first
For decades credit card companies have acted as loyalty brokers on behalf of retailers, collecting less than 3% per transaction in exchange for qualifying customers who redeem promotions. Credit card companies like American Express take the time to carefully qualify the visitor.

This is the magic of credit card companies: their capacity to qualify visiting patrons. The retailer sustains a short term loss, knowing they are attracting the right type of customer. Think of credit card companies as a way to ‘outsource loyalty’. They run all the checks on consumers spending and salary per month, and then peg customers into tiers using different cards to distinguish different value points.

In Singapore, American Express has several tiers of cards. Each tier pegs a customer’s value. To become a member, American Express requires customers to complete forms and disclose their salary. Retailers then pitch different promotions to different card members. The card functions as a gatekeeper to preventing the wrong type of customer redeeming a promotion.

A retailer may have no issue accepting a $4 loss on a bowl of soup, if they knew the customer eating the bowl of soup made $50k in salary per year, and could afford to pay the full price of $10.

Enter Foursquare
As much as the creators of Foursquare have recently tried to turn it into a location-based deal app, it isn’t. Foursquare is not part of the discovery process of finding a restaurant. Users open the app and ‘check-in’ to Foursquare after they have made a decision to go to a particular destination.
So offering deals is rather pointless when you’re sitting down and about to start eating.
However, what Foursquare has done well is create a new kind of loyalty model using social rewards. Loyalty to an outlet is not created by credit card points or 50% off deals, but by how Foursquare moves users up the social ladder.

While Facebook and Linkedin rewards users by telling others how many friends and connections you have, Foursquare is about badges and mayorships, Unlocking ‘badges’ is a gaming element, which has made social gaming platforms like Microsoft’s X-Box 360 very sticky.

Strategically, their deal with American Express in the US is a step in the right direction. While American Express concentrate on driving qualified customers, Foursquare checks them in and provides additional loyalty elements that someday, may be convertible to credit card loyalty points.
If Foursquare continues to develop social rewards using badges and mayorships, they stand to become a powerful loyalty platform for retailers. 

Anthony Coundouris, Business Operative, Futurebooks