How to Break Into the Daily Deals Space
If you're looking for a growth industry, this is it. Daily deals sites are expected to generate nearly $3 billion in revenue this year, and by 2015 the market could reach $4 billion, according to a BIA/Kelsey estimate.
Forbes has called the industry leader, Groupon, the fastest growing company of all time. And while investors may have shaken their heads at the Chicago-based three-year-old company turning down an offer from Google last December estimated at between $5 and $6 billion, the company has proven its worth with its IPO slated to be valued at around $750 million. Other fast-growing companies share large slices of the market, too. LivingSocial, for instance, was founded in 2007 in Washington, D.C., and today has 28 million subscribers. It's another IPO contender that's earned more than $630 million in funding.
Now, it seems, everyone wants a piece of that pie. Groupon's success has inspired a torrent of clone sites—by some estimates, up to 100 in the United States and 500 globally. Plus, there are scores of sites and apps tweaking the Groupon model by going hyper-local, or focusing on a niche segment of the market.
"What's so great about the daily deals space is that it has no limits. It works in every space," says John Amato, the founder of MarketSharing, a new deals marketplace that's targeting small business. "You can look at any geographical area, and they're crushing it, or any vertical—wine, travel, anything—and they're crushing it."
Yes, plenty of new companies are finding success, but it's a market that's grown extremely crowded, incredibly fast. Still want a shot at breaking in? Here's how the experts—five founders of new and fast-growing deals sites and platforms—advise you join their ranks.
Breaking Into the Daily Deals Space: Consider Your Niche and Market
Deborah Leff, a resident of northern New Jersey and a veteran of the software industry, had been working on finding a coupon-like partner for an application her company was watching. She began following the rise of Groupon, and the emergence of other daily deals, such as LivingSocial and kgbdeals.
"Seeing all of these offers come in to my in-box that I couldn't participate in because I was a little too far from New York City was frustrating, and I was getting awfully drooly looking at them," she says. "One day I was bellyaching about it to my husband, and he said, 'why don't you bring it to places that it doesn't exist?'"
Leff not only did so, but made the strategic move of narrowing her market further to suburban women with children. She figured so many Groupon clones already existed, why not target a loyal customer base with spending power—but also with a particular taste for getting good deals. She launched Suburban Momma (tagline: "Come to Momma for a Good Deal") in Bergen County, New Jersey, in July of 2010.
"We tried to create a very female-friendly site," she says. "Our hypothesis was that if you're a woman living in the suburbs, there's a high probability you have kids."
Now, with 20,000 New Jersey subscribers, the site also features deals for South Jersey and the suburbs of Philadelphia. While only one-third of the deals featured are actually family-related, the brand heavily targets mothers and young professional women, by not only offering local coupons, but also associating them with Daily Candy-style recommendations.
Suburban Momma found success by targeting both a unique vertical—mothers living outside of cities—and specific geographies. Stuart Wall, the co-founder and CEO of online deal marketplace Signpost, says to enter the deal space right now, focusing on your market and your vertical are crucial to success.
"I recommend everyone launching into the daily deal space not replicate Groupon and LivingSocial, because although that business has a very low barrier to entry, they are very, very difficult to scale," says Wall, whose company is based in New York City and launched in October.
Nhon Ma, the 29-year-old CEO and co-founder of Tenka, a curator of deals through social media, agrees that it's easy to accumulate e-mail addresses and offer merchants' discounts. But he says, "if you look at the major metropolitan areas across the United States right now, there are at least four daily deal sites in each of the, so it's going to be very hard to compete head-to-head. I'd absolutely advise getting into a more verticalized niche."
Dig Deeper: 10 Pros and Cons of Using Groupon
Breaking Into the Daily Deals Space: Find a Unique Way to Reach Your Market
That considered, Tenka offers mainstream deals for food, drink, and entertainment around New York City. How does is differenciate itself?
"We don't spam our users with hey this is the deal of the day. Instead, they get it though friends on their Facebook news feed," Ma says. "And on our mobile app, people can see—and redeem—nearby deals. So from the consumer side it's more like a Foursquare check-in."
With Tenka, anyone can "grab" a deal, but to do so must allow Tenka access to their Facebook account, where the fact you signed on for that deal—such as a free beer with the purchase of a chaser at the 12th Street Ale House—is publicized on your News Feed (if it's a free deal, versus a discount, which is not mandatory to post). Friends see your nod to both Tenka and the 12th Street Ale House. Mah says he's trying to make Tenka a perfect fit for businesses looking to boost their social-media presence and appeal.
He says the idea came from his experience operating a Korean taco truck in New York. He says Twitter was optimal for letting people know where the truck was, but didn't translate into creating a loyal fan base. He couldn't work out a deal with Groupon, so he tried Tippr, which was the region's fourth-largest deal site at the time.
"We got customers, but the quality of the consumers it would drive weren't that great. They weren't local, so they weren't going to come back," he says. "We wanted to do something that could leverage data, personalization, and bring that to small businesses to drive localized consumers."
Loyalty's a hot niche to hone in on at the moment. Seth Priebatsch, the founder of Scvngr, a company based in Boston that uses location aware applications to link customers with local merchants, this year launched LevelUp, a loyalty-encouraging daily deal system. He says because "Groupon and LivingSocial aren't going to touch loyalty with a 10-foot pole, it's been an untapped part of the market.
"The only way to enter the space really is to be different—either get really good at a niche segmentation, say, people who like hiking, or get into a space that's untapped. The biggest untapped area of this space is loyalty," Priebatsch says. He's pairing the strategy with deals at a hyper-local level, for things people can do with their friends, such as entertainment, cafes, and tours. He says it's working: his company made $1 million in the first six weeks of 2011.
For Amato, the market saturation isn't the only challenge to tackle in his new business-to-business deal offerings.
"Some of our problems are getting involved when someone has already had an experience with one of those companies," he says. "There's a perception that daily deals sites aren't yielding the return on investment that was intended for the retailers. The verticals are running out. We're lucky to be in the space and coming to market now."
Dig Deeper: How to Narrow Your Target Market
Breaking Into the Daily Deals Space: Understand the Challenges of Scaling
The common wisdom of the daily deals space at the moment is that it's extremely easy to break into, but equally difficult to scale a new venture. Amato's no stranger to scaling a business: he built his New York City-based outdoor-advertising company, Show Media, from zero to $15 million. "Online deals have become very expensive businesses to run. This is not a bootstrapping business," he says. "I've had to get a monster team of very smart people in place to run this. None of those people are free—and advertising this out to the public is expensive, too."
Amato's MarketSharing is starting out with more than $1 million in investor funding. Leff, on the contrary, focused acutely on minimizing the costs of launching Suburban Momma from the start. Her main cost would be creating a functional website. Instead of hiring developers from the start, she purchased an inexpensive system from an Indian software company.
"It took us three months to be able to hire our own development team and rebuild the site from the ground-up," she says. "But it was important for us to own our own system from the start, even though it was challenging working with something built by an outside company."
Leff continued hiring as her site—and her profits—grew. But finding talent has been tricky, as Suburban Momma has grown to having five employees, Leff is just hiring her first sales representative who has experience working at a major daily deals site.
"The biggest challenge in this new space is that there's not an existing talent pool to pull from. There aren't case studies on how to start a daily deals site—you're basically figuring it out yourself," she says.
For that reason, when hiring sales representatives, she looked for talent and good personality traits rather than a relevant resume from candidates.
Wall at Signpost says his biggest hiring challenge is engineers. That's because Signpost doesn't have a big internal sales team; rather, it uses an external team of "deal scouts." They're basically customers who go out and source deals, and who can share the profit in the deal if it sells well. "It's our system that works, because in the crowded daily deals space, the number of calls a rep has to make is getting higher per deal made," Wall says.
Dig Deeper: Daily Deals Expanding Globally
Breaking Into the Daily Deals Space: Getting the Right Deals
"I wanted to create a company that people wanted to be associated with, whether as a customer, business partner, or an employee," Leff says. "I never ever wanted to send a customer of ours to an establishment and for them to feel underwhelmed."
Part of Suburban Momma's salespeople's jobs is to find hidden gems in the community, and create deals that work to draw more foot traffic in to the business, bring it a little bit of profit, drive profit to Suburban Momma, and give the customer a good deal.
Only, at this point, too many daily deals sites haven't been able to replicate the win-win-win—even Groupon and LivingSocial have been criticized for creating deals that overwhelm small businesses, cutting so far into their profit margin it puts them in the red.
Plenty of strategies exist to create deals that are favorable to merchants, customers, and the provider alike. Consider Signpost and Tenka, which each limit the number of deals that can be redeemed.
Signpost also allows business-owners to set very particular parameters for when and how customers can redeem their coupons. For instance, Village Cuts in New York's East Village might have a pretty booked-up appointment calendar, but it might find itself empty on Mondays. It can offer a deal that allows 20 people to buy, and only come in on a Monday. Voila: the appointment slots are filled.
"I think we're just starting to see innovations that address pain points for businesses that Groupon and LivingSocial don't address," Wall says. "My advice is to look at it in a new way, so that small businesses don't have to learn all over again that deals aren't always good for them. They can be."
Dig Deeper: How Group-Buying Works for Small Business
CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer
Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.