Bonuses and coupons: the market to shake up e-commerce – part 1/3

2011. 06. 02.

A war of words has broken out in recent months among the participants in the increasingly competitive online bonus/coupon market, which is not surprising, given the explosive growth in this market. GKIeNET, in cooperation with the E-Business Research Center of Corvinus University, has been tracking the key metrics of the participants since the inception of the segment in Hungary. In the wake of the intensifying debate in blogs, the press and in media statements, a decision was made to publish certain results of the research in order to make it possible to evaluate the results of companies objectively. The results will be shown in three press articles, the first of which is the present discussion.

Group purchasing power

Despite the economic slowdown, online commerce has been growing  steadily, as sooner or later the increasing number of internet users tend to embrace the internet for their shopping needs, as well. After the crucial initial step most first-time users become regular online customers.

By creating buying communities, internet users represent significant purchasing power. Businesses that can unite them can potentially obtain substantial group savings off the regular prices of products and services. All they need for success is to secure offers that are tempting for customers, as well as a viable business model.

New sales model in the e-commerce market

Beginning in mid-2010, websites based on a new sales philosophy emerged next to the auctions, which had been the primary widely popular online shopping option. Websites offering deals through bonuses/coupons have been on the rise since the initial success of Groupon in the US, which was founded in 2008, and these sites are still in their early stages of growth.

The main attractions of online companies based on coupon bargains are the discounts of 50% and more, given that hot deals like these encourage impulse shopping.  Shoppers visit these sites because knowing the deals, they do not want to miss out on the irresistible bargains, and not because they need something, however, they are required to make instant decisions given the time limit of the offers. The rapidly rising number of sites promoting discount and bonus/coupon shopping have more and more attractive daily offers, and new online bonus/coupon firms are being launched almost every day.

figure 1. – launch dates of the various players in the domestic e-coupon market

However, the e-commerce sites offering bonuses/coupons also show evidence of the long-tail effect: a few sites make up 80-90% of the total turnover, while the growth curve of the rest gradually lags behind the market leaders. Occasionally businesses concentrate on specialized product groups, as seen in the development of various sites in other countries.

The ideas came from overseas

Websites offering daily deals started to evolve despite the initial failure of Mercata. Woot.com,  launched in 2004 and eventually acquired by Amazon in 2010, was the first to successfully implement this business model, which typically lends itself to clearing surplus inventory. Woot, however, was primarily focused at selling discount-priced products.

Groupon, founded in November 2008, has focused on the marketing of services rather than products, which they have been selling electronically in the form of group coupons (groupons). As of April 2011 Groupon is active in 300 markets of 35 different countries, with over 35 million registered users and an annual turnover of over half a billion euros. The company is expanding worldwide at a remarkable rate, and they acquire the largest local market players wherever they can. A few examples of their acquisitions: Following the purchase of Mob.ly, a mobile technology company, Groupon acquired the European MyCityDeal (May 2010), the South American ClanDescuento (June 2010), the Singaporean Beeconomic.com, the Japanese Qpod.jp, the Russian Darberry.ru (both in August 2010) and the Indian SoSasta.com (January 2011).

Building on Groupon’s success, many competitors entered the market. A more prominent one is the Washington-based LivingSocial, offering coupons in as many as 400 cities across the United States, Canada, the United Kingdom, Ireland and Australia in May 2011. In China the first Groupon-like deals site was called Tuangou, and thousands have followed suit since then. Other substantial international market players include BuyWithMe, Jasmere.com, Fab.com, Weforia, Groop Swoop, Groupalia, TownHog, TeamGrab.com, Baredeal.com, Agenzy.com,  DailyQ.com and eWinWin.

Some sites focus on certain segments from the beginning: the British Keynoir provides exclusive hand-picked lifestyle offers to its members, while in two large cities in Indonesia (Jakarta and Badung) promo-seekers can purchase restaurant coupons on Lapar.com. Given the increasing number of promotional offers, more and more smaller businesses will likely specialize in niche markets.

This is only  the beginning

Bonus/coupon web sites backed by companies with billion-dollar venture capital investments have started a new advertising trend, entering the market as new actors with new advertising solutions. At the same time there are relatively few products and services where retailers can afford to offer discounts of this magnitude.  Instead, the discounts are offered with marketing-type goals in mind, aiming to lure new customers. These, in turn, are hoped to become repeat buyers at the full price. Customers, on the other hand, see an opportunity to try a new product at a reduced price, and the bonuses/coupons may even become gifts.

Bonus/coupon sites have every opportunity to bring significant changes to the online retail market in 2011 in Hungary as well. The business model works just as well in this country, without major changes compared to solutions found to be successful overseas.

Bringing in new online customers

Even though the first Hungarian bonus/coupon websites launched less than a year ago, 1.5% of the 14-74-year-old  population had purchased products or services this way in April 2011.

This development of online consumer sentiment is especially interesting considering that as recently as 2009, nearly half (47%) of Hungarian consumers had a negative attitude about coupons, which were still paper-based then, and marketing professionals were also cautious in using them. (GKIeNET survey, 2009, N=1000). This was mostly due to a mentality that perceives cheap or discounted goods as shameful. Complications surrounding coupon-based purchases and often hostile attitudes by retailers, as well as a mistrust of the online shopping environment have added to this. However, this negative attitude may be changing as a result of online sales, and the power of the community may create trust in consumers. April 2011 data identified large discounts as the main impetus in initially trying bonus/coupon purchases for 19% of consumers.

Positive reception by consumers has lifted bonus/coupon websites into the ranks of the fastest-growing online ventures. The next part in our series of articles will analyze the business model behind the success.

GKIeNET, BCE E-business Research Center

Click to the pictures for the original sizes

Based on a nationwide representative sample of 1000 internet users in a CATI survey – GKIeNET consumer survey.