Wheeling and Dealing Through 2011

On this seventh day of Christmas, are you, too, having trouble finding those elusive seven swans a-swimmin’? Well, it just might be that one of the thousands of online deal and/or group buying sites might have just what you are looking for at a price that is at least 50% off the suggested retail purchase price. These sites, most recently made famous by Groupon, Gilt and Woot came on strong in 2010 and will only grow stronger and more diverse in 2011 and beyond.

Deal sites though have been around for a while. Remember Overstock.com?  Believe it or not, they were the early adopters of this phenomena, kicking things off in 1999 and recognizing the potential of the internet. Their idea was to take their off line business (selling at flea markets) to the millions of people who would one day flock to the web. In 1999, gross sales were only $1.8 million dollars but by 2001 they had 7 million visitors a month to their web site. (Related Article: S-Commerce- A Fourth Retail Channel: An Overview of Social Commerce and What’s Fueling its Growth)

For most people though, the notion of a “true daily deal site” is associated with the launch of Woot.com in 2004.  Quirky products and irreverent copy combined with group buying thresholds created a cult following for the site and the products it featured and introduced us all to the idea of “group buying.” Like Overstock, Woot really was a deal site too– it bought closeout merchandise at rock bottom prices and then sold it to consumers at slightly more than rock bottom prices and pocketed the difference. Offers were mostly electronics, games and toys and Woot itself sent the stuff right to your doorstep.

Today, the notion of daily deals conjures up the notion of the 800 pound gorilla  of a deal site Groupon and the thousands of wanna be Groupons that operate much differently.  Instead of buying stuff and reselling it, these sites recruit long tail merchants, charge them hefty (sometimes as high as 50%) commissions and sell coupons to consumers that they redeem at their physical storefronts. More advertising platform than deal platform, the value proposition for merchants is access to Groupon’s massive email distribution list in exchange for the promise of customers who visit once at 50% off and return as more profitable regular customers in the future. Groupon took the concept of “entertainment books”  – those physical books of coupons to the local merchants most people never tried but might be enticed to do so at a steep discount-  and brought into a Web 2.0 world that today has amassed 35 million names on its email list and at least one suitor willing to offer a  $6billion dowry to marry it. (Related PYMNTS University Lesson: eCom 301 (elective) — Evolution of Online Commerce)

The dour economic conditions in the US over the last couple of years have fanned the deal fires even more as pinched consumers look for bargains on just about anything – ideally the stuff they see in stores today and want to buy, but more likely, stuff that doesn’t sell  for one reason or another but is offered at a price that makes those items attractive. Gilt, perhaps the most storied “flash sales” site began as a solution to the problem of excess inventory brought about by the crummy economy in 2008. While their business model has evolved to feature exclusive lines made just for them , their invitation only access to a daily sales on apparel (for men and women), shoes, accessories and  home furnishings seems to have stuck .

Deals are not just the purview of the online environment. FourSquare (among others) and now Facebook Deals bring geo-targeting to mobile users and merchants and retailers as diverse as Starbucks, Target and Dillards and are incenting customers into their stores by offering mobile coupons that can redeemed at checkout in store. Redemption is quite kludgey now but will only improve as IP-enabled POS systems enable a more robust and user friendly experience.

Even traditional payments providers are getting into the deal mix. Visa, American Express, MasterCard and PayPal all launched their own version of deal sites in 2010, mostly powered by affiliate networks that do the heavy lift of merchant recruitment, deal structure and fulfillment.

So, what’s the relevance to payments companies in 2011 and beyond?  A couple of observations.

First, consumers have now been trained to look at deals, which is great for the consumer but potentially lousy for the merchant and possibly even lousier for the economics of merchant funded programs that might have fewer dollars to play around with.  [Now, I know what you are thinking, all of that money that the merchants are saving in debit interchange will be plowed right back into these programs, right? Perhaps another topic for another day.]I’ll talk more about the relationship between deals and rewards and loyalty in a post this time next week but I’ll flag that as something to consider when thinking about the structure of such programs.

Second, deals are now everywhere. I googled “deal sites” and got 237 million returns. The deals all start to look the same after a while. Today, you can get Dolce & Gabanna sunglasses on Gilt for $150, next week they’re on Rue La La for roughly the same price and two weeks later a slightly different pair is on  Idelli for a few dollars less. You miss one deal, you can always find the same thing (or sort of the same thing) at some point in the not too distant future. The point here is that just offering a “deal” isn’t going to differentiate a payments provider or engender loyalty to a payments product. There is just too much competition, especially when so many of the affiliate networks that power these deal sites offer similar merchants with similar deals.

Third, and an extension of two is the paradox of choice. Too many deal sites equals too many choices equals consumer paralysis.  Smart deal sites will shift away from deals to deal curation and help consumers with the selection and buying process. Payments players with strong merchant networks and rewards platforms seem well positioned to capitalize on this idea.

Finally, marketers and advertisers are realizing the tangible benefits of driving marketing messages and promotions to specific consumer segments with benefits tied to registered payment transaction vehicles.  It’s what MasterCard is doing with its MasterCard Marketplace. Marketing messages tied to registered payments help marketers and advertisers prove a direct return-on-investment relationship between advertising and sales by tying a marketing message to a transaction vehicle, and then proving the transaction at the point of sale. Deals, with their instant gratification nature (versus buy, get points, accumulate points, redeem points for stuff I really don’t want or like) make that relationship and payoff even stronger. (Related PYMNTS University Lesson: eCom 302 (elective): Emerging Competition)


Twelve Days of Christmas

  1.  Did Payments Get a New Mom, or Enter Rehab?
  2.  Will 2011 Be The Year of the Opt-In?
  3.  Is 2011 the Year for Social Commerce?
  4.  New Global Payment Schemes: Imitation, the Sincerest Form of Flattery?
  5.  Small (Biz) Is Beautiful and Plentiful (for Paying and Borrowing)
  6.  Who Will Process My eCommerce Payments Now?