Is Facebook a Groupon Killer?
“Facebook Deals” was launched yesterday and is set to compete with Groupon, Both address the same target audience: Consumers who buy in groups to get a large discount on the buy side and businesses who are willing to give a large discount if there is enough buying power with the expectation that many will become repeat buyers. The discounts are on average 50% and businesses pay a large commission for the organizer (Groupon or Facebook) to do the marketing through their networks.
Groupon basically became a billion $ company within only three years.
Andrew Maison already beats Mark Zuckerberg at the race: The company that reached a Billion Dollar the fastest. Now the next race is the one for sustainability. This is a the more strategic race – and the winner takes it all.
UPDATE 10:30 PM:
Remember Microsoft putting Netscape out of business when they offered Internet Explorer for free? In accordance to our research FB Deals is currently for free! Groupon asks for a staggering 50% commission on sales.
Three key questions:
1) Will Facebook be able to take a serious piece of market share from Groupon?
2) Will Groupon become an acquisition candidate for Facebook or Google?
3) What can Facebook do that the almost 1,000 Groupon clones couldn’t figure out?
1) Comparing Groupon with Facebook
| Groupon | ||
|---|---|---|
| Target audience | local consumer | local consumer |
| Expected discount range | 40 – 70% | 30 – 80% |
| Seller acquisition | Individual sales people | Online sales acquisition |
| Buyer acquisition | Database of 20+ million | Facebook’s 600 Million user |
| Commission from vendor | 50% | Currently the service is free |
| Marketing range | email marketing | Inside Facebook marketing |
| Service spectrum | Marketing and financial transactions |
Marketing and financial
transaction |
| Deal features | Limited time offering + Volume limitation |
Limited time offering |
| Deal presence | Groupon website | |
| Customer Reach | Local database i.e. San Fancisco: 200,000 |
Facebook database i.e. San Francisco: 300,000 |
| Image factor to buyers | Cool, like it | Cool, like it |
| Image factor to sellers | Very expensive, but lots of new customers not likely to repeat |
An attractive alternative Willing to jump |
Initial assessment:
Facebook is working hard to automate the engagement process for sellers so the very expensive Groupon team can be beaten from a cost structure point of view. However – many small businesses are more likely to work with Groupon because of their physical engagement. Facebook will need to learn fast what the best model of engagement is.
The sheer size of the Facebook presence in the consumer space may look like a no brainer to see Facebook as a winner but as so often the devil is in the details and Facebook is a social network, not a commerce engine – yet.
The other question that is completely open is the IP side (Intellectual Property). I.e. is Group[on having some patents or other IP that may get into Facebooks way and end up with a billion $ law suite. Groupon received a staggering 1 Billion Dollar in funding. That means that there must be an IP game here – otherwise who would invest that amount of money in a business that seem to have zero barrier to entry.
Summary: Facebook could gain a lot of ground fast. The company is no less sexy then Groupn and the fan circle around Facebook is huge. Sellers are not excited about the fee structure of Groupon and the ones we interviewed stated that they would not do a second deal with Groupon.
2) Is Groupon an acquisition candidate?
Not so sure. Investors who put $1 Billion in a “startup” may not look for a typical 10X return but at least 5 so who would pay $5 Billion? Well Google offered $6 Billion and that was turned down. Facebook doesn’t need to because they could easily put that amount of money to continue competition until they are down. Others? There are a few but this would be just a huge ticket to swallow. Did those investors lock themselves out of a liquidity event? Sure not. So what gives?
Well I can see three scenarios:
1) There is a serious IP protection inside Groupon that may make them the dominant provider of group selling services and force Facebook to pay a big ticket or get out of their way.
2) There is enough money invested and enough focus in Groupon to continuously compete, go public and become a $15 Billion trading business, working with the 8 Million businesses below 25 employees which represent 95% of all US companies. And continue to compete with Facebook.
3) Bad luck – it happened before. Over and out.
3) What about the Groupon clones
There are on average 1,000 companies that tried to clone Groupon. Some in China grow very fast and similarly in Europe and Australia. The Groupon deal anatomy is pretty simple on the surface, and that made many people to clone it, but rather tricky inside. You need to understand a lot about group dynamics, buying behavior and more to actually compete. There are currently more clones folding their business already than starting new ones.
I believe there are two types of clones that can make serious inroads in the group buying business:
A) Businesses that that are run in a culture that is not identical to the US culture and grow fast to get enough momentum to stabilize and be a hard nut to crack for any exerterritorial competitor. Countries with a very prominent and self contained culture including China, Japan, France, Italy, Spain, Latin America are much harder to impress with “Made in America” then some others. Time is of essence.
B) Businesses with a massive network like Facebook is the other group that can build some serious competition. The question here is how fast can they learn everything about selling and buying behavior, changes in buying behavior, experience with the small business world in general. Facebook certainly has the reach to get there – but just another group deal platform is probably not enough. If Facebook is serious about this business they certainly have something that the other 1,000 clones never reach: The network, the breath, and the depth to do something serious.
Summary
Social Commerce is just starting. It is certainly influencing the way of doing business like eCommerce did 20 years ago. If Groupon will lead that business it will need to make some significant improvements from being a next generation eCommerce platform to become a real Social Commerce company. Groupon is not there yet. Facebook on the other side has social in it’s DNA and has enough power to literally build any application they want.
But that is also not enough to win the commerce game. Big MIcrosoft was never really able to win over Oracle in the database business – and they tried hard. Huge Oracle was never able to really win over SAP in the ERP business. Big Google was never really able to win in the social media business – and boy did they try. There are many business segments that are not determined by the ability to build the solution – but by the depth of understanding of the problem. And there are many strategic options for Groupon to expand way beyond the current business. It will be an interesting time as both have a huge potential to win this multi billion $ opportunity. Right now how ever – it doesn’t look good for Groupon.
Axel
