Recently, I was thinking about whether Groupon’s virtual coupon sales model might offer a way to boost e-commerce in growth in emering markets. Unlike traditional e-commerce business models, which mostly help people by products online, and which depend on credit cards, strong logistics infrastructure, and efficient postal systems, Groupon simply uses the online channel to generate coupons to be used in real-world interactions. So, can Groupon’s model bypass traditional emerging-market e-commerce barriers?
First, some background on Groupon. The Chicago-based pioneer of online “daily deal” coupons surprised many when it turned down Google’s $6 billion bid to acquire it in December of last year. However, the refusal to cash in increasingly looks like a no-brainer. On April 15, the Wall Street Journal reported the company expects its upcoming initial public offering (IPO) to generate a market valuation of $15-20 billion.
Groupon’s spectacular growth probably accounts for the sky-high valuation. Between 2009 and the end of 2010, Groupon grew from 120 to 4,000 employees, expanding from 30 to 565 cities, and multiplying annual sales from $33 million to $760 million.
Groupon’s success owes to the way it has turned an old, stale form of advertising – coupons – into something exciting and lucrative. Groupon’s members sign up to receive coupons by e-mail each day from local firms, which range from Mexican restaurants to, yes, water bikes. Groupon’s twist is to set the coupons to expire after just a few hours. It also cancels coupons that do not attract a minimum number of buyers. Although this rarely happens, it induces buyers to spread the word among friends, boosting coupon uptake and word-of-mouth about the advertiser. In exchange for this attention, Groupon demands steep commissions – typically 50% of the total “savings” from all sold coupons.
Much of the optimism for Groupon’s valuation may tie to its growth prospects in international markets, including emerging markets. For example, Groupon is growing in China through a partnership with Tencent, China’s biggest internet company.
China is one of the few emerging markets where a large portion of the population uses e-commerce. In most emerging markets, however, e-commerce use remains low. The table below (using 2010 data from IDC and other country sources) shows how e-commerce accounts for about 1.5% of GDP in countries such as the US, UK, and Australia (and 0.9% in China), but barely registers in key markets such as Mexico and Russia.
The failure of e-commerce in emerging markets owes to several factors:
- E-commerce depends on efficient postal systems and advanced private logistics networks to quickly and accurately deliver products to customers. However, postal systems range from nonexistent to unreliable in most emerging markets.
- E-commerce depends on digital forms of payment. These can be credit cards, debit cards, or direct debit, though there is flexibility for other models. For example, Germans often pay per rechung (with invoice). Essentially, the retailer emails the buyer an invoice after the purchase. This means Germans technically “buy now, pay later” for e-commerce, although the invoices are usually paid within 30 days.
- E-commerce depends on the culture’s comfort with remote payments. This is more subjective, but it is important. Long before e-commerce emerged in the 1990s, Americans had become used to buying products remotely from catalogs, infomercials, and the like. The Internet was simply a new (and better) sales window.
Most emerging markets have failed to meet any of the three criteria. Postal and logistics systems are underdeveloped, people use cash, and payments are made in person.
Herein lies the opportunity of Groupon’s model in emerging markets. Virtual coupons are digital receipts, not products, so they do not depend on postal or logistics infrastructure. The key hurdle is that, like any form of e-commerce, they depend on some form of digital payments, and for a remote payment for something in the future.
Virtual coupons could become viable in emerging markets if people can buy them using prepaid mobile phone cards, as this is the one form of digital payment most people have access to. As long as coupon values stay relatively low (under $10) prepaid cards would be perfectly usable. Groupon (or its imitators) could partner with local wireless carriers to enable people to use prepaid top-up cards to buy the coupons.
Such a partnership might deliver the coupons via simple (possibly SMS-based) phone applications. (This would bypass the need for PCs, which many people do not own). The service might be fulfilled by providing coupon buyers with SMS codes to show merchants. (This would allow customers to skip the requirement of printing the coupons).
Of course, successful execution of the virtual coupons model in emerging markets will depend how well Groupon or its imitators address other considerations, including types of coupons, marketing to merchants, and word-of-mouth generation to customers.
The table above provides some indication of how the virtual coupons model might change to suit needs of emerging markets. Target consumers might need to include heads of households, as these are the ones who control the purse strings. Coupons might need to concentrate more on addressing functional needs. Many of Groupon’s advertisers pitch purely luxury services, and people in emerging markets have less room in their budgets for optional expenses, such as (you guessed it) water bikes.
Advertising may be more labor-intensive, at least initially, as word-of-mouth won’t work everywhere. Finally, as pointed out by Ari Lightman, a former colleague and now professor of Digital Media at CMU, emerging market merchants may not be willing to pay 50% commissions. This is particularly true if they have to deal with smaller addressable markets and sell more functional goods and services, where profit margins are already low.
All this suggests virtual coupons may be more complex and less profitable in emerging markets. However, the concept is feasible. While the opportunity for emerging market e-commerce sites remains limited, I believe we’ll see more virtual coupon plays.
Written by David Gates for Emerging Markets BlogFollow @davidegates