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.

Here at Keplar some of our recent advisory work has been for online community sites, helping them to improve their customer proposition while also growing their revenues. In the course of these projects we have started to develop a new technique for guiding the development of these sites which we call “value chain mapping” – a technique that works to improve the way community sites serve their community whilst simultaneously growing their revenue. This blog post aims to explain this technique – articulating the theory but also providing practical advice for owners of social networks. (None of the companies mentioned in this post are current or past clients of Keplar.)

Vertical social networks: a primer

For this post we focus on “vertical” social networks – these are simply community-oriented websites which focus on one content area, interest group or demographic. We use the word vertical to distinguish these community sites from general-purpose social networks such as Facebook and Bebo. For this post we use Mumsnet, the UK website “by parents for parents”, as our main example.

So, what does a vertical social network look like? Typically these sites provide their user community with a set of “soft tools” such as forums, profiles and articles, all designed to support the site’s users in socialising, sharing knowledge and fulfilling specific needs. On Mumsnet, those user needs would include childminding, keeping their child healthy, and finding a kindergarten.

On the monetisation side, vertical social networks generate most of their revenues through advertising – showing users targeted or general banner ads but also directing users towards relevant businesses for a fee (see for example the Mumsnet Mall). It’s a delicate balancing act for the site owners as communities respond badly to advertising which they deem excessive, irrelevant or dishonest.

So, what’s wrong with this model?

The current model is far too narrow

The fundamental weakness of this approach to a vertical social network is that it’s far too narrow. To continue with the Mumsnet example: parents are an important part of the parenting ecosystem, but they are only one part of it. There are many other people and organisations who have a direct or indirect role to play – from the children themselves through to care providers (e.g. childminders, paediatricians), merchants (e.g. toy shops, pharmacists), manufacturers (e.g. buggy makers) and educationalists.

In short, parenting is a huge, complex ecosystem of which parents are the most important part – but they are only one part. And a site which only gives a voice to one player in an ecosystem is an echo chamber – think of the House of Commons without the Opposition, or eBay without the sellers. These sites are facilitating peer-to-peer communication between their narrowly defined interest group, but they don’t truly fulfil that group’s needs, because they don’t allow them to build real relationships with the wider ecosystem.

Our approach for vertical social networks, then, is built around the idea that these sites need to expand to accommodate – and serve – as much of their respective ecosystems as possible. It is only by this expansion that the user needs of their core interest group (e.g. parents) can be properly met.

Mapping value chains

If this is the theory, then how does a site such as Mumsnet go about incorporating its wider ecosystem – isn’t this a Herculean task? Fortunately, each ecosystem breaks down into a set of smaller, discreet value chains. By a value chain we mean a set of people or organisations which pass value in one direction to fulfil a user need, for example the value chain for childminding looks something like this:

Our approach is to incorporate these individual value chains into a vertical social network to better serve these user needs. We do this by “mapping” these value chains into the network – in the case of childminding this would be a three step process:

1. Extend the network to allow agencies and childcarers to have individual profiles on the site
2. Provide discovery tools to allow parents to find and evaluate these childcarer profiles on the site
3. Provide market tools to allow parents to buy childcare from providers through the site

With this value chain mapped into the social network, parents are now able to discover and buy childcare without leaving the site. We are leveraging all the powerful attributes of social networks – discovery, reputation, communication – and applying them to solving a specific user need. Incorporating more of the ecosystem is then simply a case of “breaking off” more value chains, mapping them onto entities within the social network and providing the necessary tools to connect them to users.

If this is the approach, what is the impact on the site’s bottom line? The impact can be considerable, because whenever a service is fulfilling key user needs there are significant revenue-generating opportunities. To go back to childcare: in the UK alone this is a £4.1 billion market (source). If a social network can model a value chain like childcare then there are various ways of capturing a slice of that value – perhaps a small slice, but certainly much higher than any revenues from current advertisers from that value chain. Wahanda, the health and wellbeing network, is a great example of a site which has mapped its key value chains and is capturing value as a result.

Conclusion

In summary, then, value chain mapping is a way for vertical social networks to break out of their current narrow focuses and start comprehensively fulfilling their user’s specific needs. In doing so they can directly capture value from their respective ecosystems, in addition to the indirect revenues they currently make from advertising.

A social network can start small with this approach – we recommend that network owners reading this start with just one user need: take that user need, understand the value chain that fulfils it and make sure that the relevant organisations and people have a space within your network. And let us know how it goes! We’d love to get a discussion going around this post with a view to building on this approach and helping social networks to deliver more.

Interested in monetising your community site better? Send us an email to find out how Keplar can help.