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The Art of Selling Discounts

Poornima Kavlekar, The Smart CEO
July 15, 2011

Who doesn’t love to strike a deal, especially if discounts could vary anywhere from 10 per cent to 90 per cent on lifestyle products and services? Exactly the reason why group buying (discount deals) businesses show strong potential for growth in India. But there are many variables that these businesses need to pay attention to in order to succeed in this space. A strong consumer-merchant equation, a clear understanding of each of these interested parties and the capability of bringing them together in the most profitable manner are the foremost parameters. This apart, one needs to be present everywhere, scale up quickly and differentiate itself from competition. Sounds simple? Then again, who said simple was easy?

When I walked into my gymnasium during my routine workout timing, I was baffled to see a number of people waiting in a queue for their turn to hit the cardio-machines. This was the first time, in the 15 months of my membership in the gym that I had to wait for my turn. I realised then that a good number of faces were new which made me wonder if June was some auspicious month to start an exercise regime! And interestingly, the profile of the gym users was slightly different too – most of them were in the age group of 18 to 25 years from what used to be 25 years and above. As a regular gym goer, I was intrigued by this sudden change in the profile of my co-exercisers.

Well, before I lead you on, this story is not about the business of fitness or gyms in the country. This story is about understanding how the gym managed a sudden spurt in its membership without any offline promotional activities. And my question was answered by the gym instructor who said that they had sold memberships for a day through a popular group buying website. That explains two things: one, the sudden rise in membership in the month of June, and two, the change in the profile of my co-exercisers (those who have grown up with the Internet). This story is to understand the group buying landscape in India, the changing dynamics of the consumer profile and what it takes to succeed in this space.

Understanding the ecosystem

While low Internet penetration and the lack of consumer comfort with transacting on the Internet (both very critical for group buying businesses) were two major hurdles for e-commerce growth in the past, things have changed over the last two to three years. Internet penetration has improved significantly, particularly with mobile usage. "Though e-commerce in India is still in a very nascent stage – save for the travel segment, I believe that with the exponential growth of smart phones, 3G and 4G, India is at the cusp of an e-commerce explosion," says John Kuruvilla, founder-chief executive officer, Taggle, a group buying website.

While using credit cards online is still a challenge, e-commerce players have so far circumvented this by coming up with different payment options for the customer. But, Devangshu Dutta, chief-executive, Third Eyesight, a consulting firm focussed on the retail and consumer products sector, says, "We are approaching a tipping point, with more widespread availability of credit cards among younger users, who have grown up with the Internet during the last decade." This makes spending on the Internet an option that’s waiting to take off.

The gradual rise in investments by the venture capital industry into the e-commerce space in the last three years is a reflection of this change. According to Venture Intelligence, a company that provides information and analysis on private equity, venture capital and mergers and acquisitions in India, the investments in this space have increased from US $33 million in 2009 to US $83 million currently.

Group buying or the discount deals business, a model popular in the U.S., adds a whole new dimension to the e-commerce industry. Put it simply, the sector gives offline retailers the opportunity to drive traffic into their stores through the online medium. Some experts even use the term offline-online commerce to describe the sector. This space has also grabbed the attention of the venture capital industry. Battery Ventures and Greylock Partners invested US $8.75 million in Bengaluru-based Taggle in June 2010 and Nexus Ventures and Indo US Ventures invested around US $12 million in January 2011 in New Delhi-based Jasper Infotech, the parent of Snapdeal.com.

The macro picture

In 2010, group buying saw phenomenal success with Groupon in the U.S. In fact, last August, Forbes magazine crowned Groupon the ‘fastest growing company ever’. It says Groupon made US $713 million in revenue in 2010, up from US $30 million in 2009. As of March 31 this year, its subscriber base was 83.1 million, up from 1.8 million at the end of 2009.

In the U.S., the retail industry is mature and there is already familiarity with the couponing system. While India is yet to get there in both these areas, there is no argument over the business potential in this space with over 20 million active Internet users (of a total of 90 million Internet users) in the country with an increasing number of them shopping online. It has already attracted entrepreneurial interest in India with several group buying sites, such as Snapdeal, Taggle, Dealivore, Dealsandyou and Vamoosevacations.com coming up in the last two years. Apart from products and services, many of these sites offer discounted deals in their city’s spas, gymnasiums, dance classes, car service centers and restaurants.

The whole model of offline – online discount coupons is based on a simple fact that everyone loves to strike a deal, to make a bargain and avail discounts. But, like Kuruvilla shares, there is no clear road map or trends on what works and what does not in a very nascent e-commerce space in India. And this means that you need to constantly try new things and continue experimenting with novel ideas to arrive at a working formula. He thinks a working model will evolve over the next 12-18 months with consumers getting hooked to buying great value online.

"But what’s happening in India is not a Groupon business clone," clarifies Vani Kola, managing director, IndoUS Venture Partners. The business model has been adapted to suit the changing demography of the Indian consumer and the orientation and exposure of the Indian merchant to the digital world.

Success definers

Companies need to differentiate themselves from their competitors. It could be based on the target audience, types of deals, brand positioning, the sectors they target and so on. The idea is to recognise and capitalise on one’s strengths and leverage on the scope of e-commerce growth in India. Taggle, for instance, felt that everyone was playing with bottom of the pyramid deals. So, it strategised to start at the top. "The move was a necessity given that by June 2010 many other group buying sites were already very much around, and it was important to get noticed quickly," says Kuruvilla.

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