We get this a lot of times – “When are you going to start offering daily deals on restaurants?”. And we being quite in favor of ‘once and for all’, decided to write about this so that we can simply point people to this blog post when someone asks us this question next. If you have been following us, you know know that a few months ago, we made our foray into Group Buying with the launch of Zodeals.com. It was an April Fool’s joke [;-)], but honestly, we have been toying with the idea for quite some time now. Given our customer base, it seems like an obvious extension of our business model. However, we decided not to be impulsive and figure out what this Group Buying business model is really about and how it affects customers and businesses. Btw, we love discounts. Who doesn’t? Lately, Group Buying and Daily Deal sites have been trying to pamper us with mind-boggling discounts (95% being the highest we’ve seen). While the consumer is very very happy, little light is thrown on how it affects businesses who sponsor them. Also, not much is known about the health of the numerous deal sites in the Indian market with little or no differentiation. While some of these sites have already moved into discounting products (phones, camera etc..), we were curious to know how their offers on services (restaurants, spas etc..) were doing. Because that (restaurant deals) is what is relevant to Zomato. In its current form, the concept of online group buying became popular in the US with Groupon. Groupon enables buyers to purchase items at throwaway prices thanks to “collective bargaining power”. What the seller loses in margins gets partially compensated by volumes and new footfall. Pretty straightforward. It is one of the marketing activities used by businesses to speed up the rate of customer acquisition. Also, it is used by businesses to fill up unused inventory and hence recover a portion of their fixed costs. So if executed in the right way, for some businesses, there is a very clear upside in offering such a deal. To decide whether we should move into this adjacency, we thought of talking to a few business owners about their perceived value of daily deal sites. We selected 20 restaurant owners (all of them are already our clients at Zomato) who had at some point, experimented with group buying websites. And yes, 20 is a good enough sample set for a startup business like ours to get to a decision. (Seriously) The key message we got is that business owners believe or are made to believe that their Target Group (TG) loves discounts and will flock their shop to avail it. Yes, in most cases people do turn up in decent numbers. But here’s the catch – most (17 out of 20) business owners now feel that the customers who turned up are actually not their TG. They are a set of deal hunters who would never buy their products at normal prices. To help you understand this better – imagine this – if you are a group buying customer and paid Rs. 250 for a Spa during the deal days, will you ever pay Rs. 1000 at the same Spa a month later? Or will you hunt for a heavily discounted deal at some other spa? Wharton marketing professor David Reibstein seems to agree:

“Unfortunately, the people Groupon is attracting are those who are referred to as “deal prone customers” — who are, to put it differently, price-sensitive customers. These customers tend not to be the most loyal of customers. And because you have attracted them with a low price, you are more likely to lose them because somebody else offers a lower price. The merchant might say, “Well I am not making money on these customers, but hopefully I am building some future business.” But there is the challenge of whether they are really building future business, because what they really getting is a fickle customer. Merchants are going to discover that the Groupon customer is not where you build your future business. Therefore, the savvy merchants are going to learn that this is not a good way for them to do business.”

Source: Knowledge@Wharton To summarize our discussions with the 20 restaurant owners, all of them said that they do not think there is any long term value in going for a group buying deal, because most of the customers who bought the deal did not show up at their restaurants more than once. They now realize that the TG of a business comprises of people who can actually afford the place even when there is no discount. After all, how long can a business continue deep discounting? A couple of weeks perhaps. At most a month. Not beyond this because there’s a significant cost (discount) attached to the deal. Thereafter, the business has to sustain on the basis of customers who can pay their rack prices. Our clients also agreed that their brand hardly got exposed to this ‘real’ TG during the deal days. Instead, it gets exposed majorly to people whose loyalty is to the discount and not the brand. The day the deal is off, these people shift their loyalty to the next place offering similar services at a deep discount. We also decided to look at the unit economics currently at play, and interviewed a former Daily Deal Salesman (who could give us more dope on the business model). Here is how the conversation went: Q: “How much money did you make per client?” A: “The last deal I made was to sell a Rs 600/- buffet at Rs 250/-. Our commission was Rs. 50/- and the merchant kept Rs. 200/-” Q: “How many coupons got sold during the deal?” A: “50. That means I bring in 50 x Rs. 50/- = Rs 2500/- for my company” Q: “How many such deals would you need to do to recover your own salary plus some overheads?” A: “At least 20 per month to recover my salary and overhead…which is not easy.I could never imagine my individual contribution to revenue touching a lakh of rupees in a month. That effectively means there’s a cap on my commission.” This daily deal salesman is a great chap and is doing very well as part of our sales team. Overall, we think that in India, the current group buying sourcing and distribution model does not always work for the services industry. In some cases, it does, but mostly, it does not. Our conclusion is that we will wait until we find that perfect sourcing and distribution model which will keep the unit economics low and will provide long term sustainable value to customers as well as businesses.