Facebook to Groupon: “Look out, we’ve got 500 million users”

As the market for daily deal sites is continually ballooning, venture capital firms seem to be throwing caution to the wind as they invest millions upon millions in what seems to be unwarranted high valued start ups. This isn’t a riveting intro to this blog entry. Group coupon sites have created a massive buzz on blogs for the past couple of years. So what’s new this time? Well, Facebook just entered the market (WSJ) and with their 500+ million users, these sites should be scared. Facebook can help advertisers and retailers drill down to reach their target market in a matter of simple steps. And because so many young folks make Facebook the hub of their online existence, offering them daily deals will be a welcome addition to their feeds, their friend’s feeds and their like buttons — sharing deals you like on Facebook is easier than sharing any other way. Plus, Facebook will certainly add social graphs, existing places functionality and links to business pages. Editors note: Groupon, you should have taken that $6B offer from Google.

Woot.com started this trend years ago, but Groupon and LivingSocial changed the model a bit to leverage group couponing, and copycats quickly followed such as BuyWithMe, GroopSwoop, EverSave, and many, many more (low barrier of entry and nothing special for creating competitive advantage). These sites are great for consumers, but what about the businesses themselves? Does the owner of that spa on Main st. end up seeing a valuable ROI from offering a 50% off discount through one of these sites? In the short term, sure, these deals have the ability to be great lead generation services — in the long term though, I doubt it.

Sales and marketing costs from running your business at a loss to satisfy the couponing aside… there exists a massive fundamental problem with most daily deal websites and their models.

The bigger these daily deal sites grow under their current models, the less effective and more costly it is for their clients. You see, there exists coupon chasers, those who are constantly buying coupons not with the intent to discover new businesses, but with a goal to pick up massages, manicures, etc. at large discounts (which is great). However, once the deal is used up, it’s on to the next one… never again to return to a business and why would they? The more Groupon and their copycats churn out daily deals, the less incentivized these folks are to ever return to a business after they use a coupon. These sites need to implement a strategy that allows for effective post customer engagement for their clients.

Facebook entering the market doesn’t solve the model’s problems entirely — but it creates a more involved and local ecosystem for users to use. Groupon is not social in nature (sure you can tweet a deal or email a deal to a bud), yet Facebook adds the inherent social layer. And because Facebook is ingrained into our daily routines already, the businesses using Facebook daily deals will ultimately win in the long term.

For a more effective Groupon business model and how it can become a main stay in a local business marketing strategy check out Zac’s blog.