There are only two deal companies that matter: Facebook and Google

Much has been made of Facebook’s decision last week to exit the daily deals space. Yesterday, Yelp told Bloomberg’s Doug MacMillan that it is also exiting the daily deals space.

A lot of the analysis has used these examples to illustrate what a great position this puts Groupon and LivingSocial in. That analysis is wrong.

I reached out to Facebook PR for some more detail on their decision. Here is what spokeswoman Annie Ta told me (emphasis added):

After testing Deals for four months, we’ve decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local businesses.  We remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals. We’ve learned a lot from our test and we’ll continue to evaluate how to best serve local businesses.

That reads to me like Facebook is still very committed to local, it’s just that they don’t see the daily deals model as the right path to it. Like Google, I’ve always thought of Facebook as too good a company to be in the space in its current exploitative state and I’m happy that it got out.

Over the last couple of months, I’ve had several conversations with Eric Rosenblum, the head of Google Offers.

Part of the reason I haven’t aggressively beaten up on Google Offers, aside from the initial piece titled Why I Want Google Offers And The Entire Daily Deals Business To Die, is that I really believe that they want to do the right thing. People have pointed to the slow rollout of Google Offers as a sign of weakness and the relative strength of Groupon; I view it as a sign of discipline and wanting to truly learn about what works and what doesn’t for merchants. They view it as a market-entry strategy and a way to educate local merchants about online advertising. (To be fair, I may just be buying their spin. But I don’t think that’s the case. Groupon largely has refused to talk to me, despite numerous requests.)

At the rate that Groupon is growing, it’s hard to learn anything. It’s also impossible to maintain quality talent when you grow headcount 35% in one quarter. In just one quarter, Groupon has added about as many employees as Facebook has in total.

Google and Facebook can afford to take their time. Rosenblum told me that because he’s not on a march to an IPO, he can afford to treat merchants right and build for the long term. That shows in the structure of the deals that Google Offers runs. There are more restrictions that make it a better deal for merchants.

Offers will be just one tool in Google’s toolbox for merchants. It is essentially a cost-per-acquisition model. Small businesses don’t know what an impression or a click is worth, but they have a better sense of what a customer is worth. But many categories haven’t been exposed to online advertising and that’s what Google is trying to change with Offers. Eventually, Rosenblum believes that merchants will use Google’s self-serve tools. The several-thousand strong sales army of Groupon will feel more like an anchor than a moat.

I believe Facebook has a different play. Its entire business is about connecting people and having them share information with each other. If Facebook sells someone an offer and they then connect directly with the business on Facebook, that’s additive to Facebook’s core business.

By contrast, Groupon and LivingSocial have every incentive to keep you from building a relationship with the merchant. They would much rather sell you another deal themselves than have you go back to the merchant directly. Groupon is even running ads telling consumers to stop paying full price — undercutting the value that merchants provide. At every step of the way, their business interests are directly opposed to those of merchants.

They could change that — I wrote a post with more than a dozen ways how the merchant experience could be improved — but they won’t. They’ve sold investors on the story of massive revenue growth and the fastest way to do that is to con merchants into selling big deals that they don’t fully understand. Even if they fully agreed with my analysis of the business, the best path for insiders right now is to continue the march to IPO and cash out as fast as possible.

Both Google and Facebook have enormous amounts of leverage in their business. The number of people each employee at Facebook impacts is unprecedented. Groupon is not a scalable business. In fact, it’s showing declines per employee as it gets larger. Its average sales per sales rep dropped from $172,000 in Q1 to $138,000 in Q2.

In a few years, we’ll look back and see the daily deals business as a fad that delivered untargeted, unsustainable discounts to unprofitable customers. The Groupon and LivingSocial brands may be around, having been sold to some company in a liquidation sale or bankruptcy proceeding. (Though even that may be difficult, as many merchants hate them.) Even if they survive as companies, the product they sell will be very different.

And we’ll see Google and Facebook ruling the much larger, sustainable local advertising market.


About Rakesh Agrawal

Rakesh Agrawal is Senior Director of product at Amazon (Audible). Previously, he launched local and mobile products for Microsoft and AOL. He tweets at @rakeshlobster.
This entry was posted in facebook, google, groupon. Bookmark the permalink.

7 Responses to There are only two deal companies that matter: Facebook and Google

  1. Adam says:

    What about TravelZoo? They have been in the offers business for a long time and their daily deals seem to work out better for merchants than Groupon (at least based on some of the articles that have been published).

  2. And this is where we come into play…

  3. Pingback: Offermatic

  4. Pingback: Roundup of my Groupon and daily deals coverage « reDesign

  5. Seshu says:

    What we have seen in the market we operate (a very niche market catering to South Asians – DesiSauda) the merchants themselves were not aware of the technological trends not social media (majority of the folks do not even have websites). So what we have been offering is a comprehensive package that enables them to offer great deals to their customers on an ongoing basis rather than one off.

  6. Pingback: Groupon’s cost of revenue is soaring « reDesign

  7. Groupon, Livingsocial and other group buying companies are not as great a deal as they may seem. Unless you are offering a service, rather than a product-it rarely brings any good amount of profit. You can think of it as an advertising opportunity, and budget accordingly-but by the time the company takes their “cut”, you will not end up with a good profit margin-so plan accordingly. Frankly, using social media is much more effective and there are lots of creative ways one can make use of social media communities-with less risk!

Comments are closed.