The hype around “group buying” in tech circles has been enormous since Groupon.com raised $30 million in a fund raising round which valued the company at $250 million. Techcrunch’s coverage was characteristically gushing:

“The company say they are on track to generate $100 million in gross merchandise sales in 2010. They take a big cut of that for themselves, generally 30%-50%… Groupon appears to have created a compelling local advertising platform that generates a ton of cash”.

A slew of startups established themselves in Europe to emulate Groupon including MyCityDeal, Viva Voucher, Wowcher, Groupola and Snippa.  In case anyone was puzzled why so many people were diving into the space, Techcrunch clarified in another post that: “Groupon is pulling in insane revenues”.  Why wouldn’t you want to emulate them?

There is much in the Groupon model to love – and to learn from.  Groupon’s use of virality and scarcity to drive momentum behind particular products and promotions represents a massive opportunity for a range of people in the market today, especially community sites. It is not so clear, however, that a startup emulating Groupon will be a $250 million business anytime soon…

Challenges for Groupon clones

Groupon offers a daily deal per city or locality – consumers sign up for the deal but only receive it if a critical mass of people sign up for that deal.  Because each deal is only available for a set time period (generally a day), consumers who want it are incentivized to promote it to their friends.  Groupon make this as easy as possible with direct links into Twitter, Facebook etc., so that the users themselves effectively market the deal for them -  it’s a great example of viral marketing at work.  Discounts are offered for restaurants, massages, hotels, spas and theatres amongst other goodies.  And discounts tend to be big: 40% or more off in most cases.

However, the UK is already awash with vouchers, with websites encouraging people to email those vouchers to their friends.  So in order to work, Groupon clones in the UK will need to offer vouchers for more niche and/or premium merchants that currently don’t have their own voucher schemes.  That’s certainly possible:  because Groupon creates scarcity (by limiting voucher availability for a day), companies have the opportunity to offer promotions without devaluing their brand long term, the way endlessly offering traditional vouchers or sales might.  But it means that to be successful, these startups will need to source the right deals from the right companies, and market them to a more discerning and higher spending audience than the mass market reached through more traditional voucher schemes.

The real challenge for a startup Groupon clone, then, is to build that critical mass of high value users which companies want to reach, and would be willing to spend money (in the form of a hefty discount) to acquire.  The technology required to run this type of service, by contrast, is very simple – so it’s not clear to us that a technology startup is the right organisation to seize this opportunity.

Group buying is a huge opportunity for existing community sites that already have a critical mass of high value users

For community sites that already have a relationship with a large number of high value users, group buying offers an exciting new prospective revenue stream.  Rather than monetise a community site by showing adverts, what about offering community members special offers for particular companies that they’re likely to be interested in, for a limited amount of time, that are only valid if a large number of community members sign up?  There are lots of benefits:

1. Providing unique deals tailored to the community should grow the value of the community site to members
2. Offering deals of this type will encourage members to engage with one another within the community in order to drive takeup of the offer
3. When members market the offer outside of the community (using more generalised social networking tools like Twitter), they will simultaneously be driving new people to the community site, growing the userbase

Community sites also have the opportunity to approach advertisers who might not be interested in using a general purpose Groupon-like service.  A luxury brand might be much more willing to advertise a deal to the international elite that make up ASmallWorld rather than the hodgepodge of bargain hunters on Groupon, just as a nightclub promoter might be more willing to offer deals to the dance music fans on Don’t Stay In, or retailers in London might want to advertise a deal on the Evening Standard’s website.

For an idea of how this might work on your site, it’s worth checking out Wahanda, the health and wellness community which has already integrated a daily “MobDeal” into its site.

Groupon investors take note: collective buying is a feature, not a product

Groupon’s ultimate value is in the community of bargain hunters who regularly check the site for the latest offers.  By encouraging those users to advertise offers through their own networks (via Facebook and Twitter etc.), Groupon has been able to grow that group of bargain hunters which it’s able to reach daily.

However, by piggybacking on existing social networks over which it exercises no control, Groupon is also vulnerable.  If those highly attractive – and thus highly sharable – deals dry up, then suddenly they’re left with very little.  For community sites, by contrast, offering group buying is just one of many different things the site can do to encourage community members to engage with their offering and with one another (see our previous blog post for more ideas).  That makes community sites much stickier, and puts community sites in a far better position to negotiate with prospective advertisers than Groupon and its clones.  Further, because the community site knows much more about its members, it can offer advertisers much more visibility into the type of people that are taking up offers, again making them a more attractive place to offer group discounts.

Groupon’s new business model is transformative and its valuation reflects that.  But the future is much brighter for those community sites that adopt the best elements of Groupon’s model, than for the me-too technology entrepeneurs copying it.

Interested in developing new revenue streams for your community site, whilst improving your customer proposition?  Get in touch to explore what opportunities are open to you, and how you might best go about testing and realising them.