The Truth About Facebook's Groupon Clone

Nicholas Carlson | Apr. 26, 2011, 1:31 PM |




Nobody pays closer attention to the daily deals/Groupon/LivingSocial industry than Vinicius Vacanti, CEO of daily deals aggregator Yipit.

So when we saw that Facebook launched a Groupon clone called Deals last night, we made sure to get Vacanti on the phone this morning. Per usual, he enlightened us.

The highlights:

* Facebook will have trouble convincing users that the businesses its featuring are all that great AND that the offers its presenting are all that special.

* To solve that problem it will rely on those one-in-every-social-group "deal-hunters" who will research the offer and then push it on all his or her friends.

* Facebook needs to hire 3,000 people if its serious about this business.

* Groupon and Living Social won't take a big, immediate hit on this news, but their user-acquisition costs might go up if people feel saturated by Facebook deals and start ignoring Groupon ads on Facebook.

Here's the whole interview:

BUSINESS INSIDER: Do you think it's going to do well?

VACANTI: When you look at Facebook and whether they're going to have success with this product or not, you have to think to yourself, "what motivates a consumer to buy a deal?"

What motivates to buy a deal is ultimately that either the business or service offering that deal is one that they're excited about. It's a business that has some authority to it so either it's been well-reviewed on Yelp or Vanity Fair has written about this business. Something like that.

Second thing is that the person wants to know that it's a good deal and a good offer.

The interesting thing is that Facebook doesn't really have credibility along either axis. People don't trust Facebook to recommend good businesses, and people don't trust Facebook to know what is or isn't a good deal.

Convincing consumers that this is a good business, they can do by showing interesting data around that business just the way Groupon does. When you go buy a Groupon deal, they tell you how many good Yelp reviews it has and how good each review was.

I think the challenge is how do they convince people that these are good deals. Now Groupon does that because the whole concept of Groupon is that they get us good deals. That it's a group purchasing decision. With Facebook, they're really going to need to really emphasize that to their consumers. So that's the challenges that Facebook has to overcome.

On the plus side, Facebook has 600M users and they're able to drive a lot of traffic to these individual deals.

The big bet on Facebook's side is that you have these individual consumers, the one out of a 100 that are deal chasers that are going to identify a good deal.

This deal chaser is going to see a deal, and will then look up the business and think it's a good business and a good deal. They'll message their four or five friends on Facebook and say "who wants to do this deal with me?"

Facebook is hoping that the person who's getting these deals is going to represent business and deal authority to the other consumers.

I think Facebook realizes that they're never going to convince all of their consumers to buy these deals. They just need to convince a few of them, and those few will drive these deals among their friends. And that's why I think Facebook is focusing more on social deals.

BI: Groupon and LivingSocial spend a lot of money on Facebook ads. How much does it hurt them that Facebook just launched a competitor?

VACANTI: Groupon and LivingSocial don't use Facebook to sell deals. They use Facebook to get users. LivingSocial is about 26M users deep, now, and Groupon probably is 50-60M users deep, and they've used Facebook for a lot of that user acquisition. I think they will continue to do so.

I think the hurt could happen if users get used to buying deals from Facebook and then they get pitched an ad on the right that says 50-90% off New York City's best stuff, which they've been getting pitched on for a while.

The conversation rate on those ads may drop because people feel like Facebook is already offering the same thing to them. That's bad, because then all of a sudden the cost to acquire users will go way up for Groupon and LivingSocial from Facebook to the point where it may not even make sense for them to advertise on Facebook anymore.

BI: It seems like this could theoretically be a big business for Facebook, but it put any kind of heat on Groupon or LivingSocial any time soon. Is that right?

VACANTI: I think that's right. I think ultimately. it's just more competition, which isn't great for Groupon or LIvingSocial. But it's not like people are going to use Facebook and ignore Groupon and LIvingSocial now.

Ultimately people will go where the good deals are.

I don't think people will lose their relationship with Groupon and LivingSocial. The only concern is that they may ignore Groupon and LivingSocial a little bit more, because they're getting pitched more deals on Facebook than they're getting pitched in their email, so they might just allocate less and less attention to Groupon or LivingSocial's deals and more and more to Facebook.

Whereas Groupon and LivingSocial had 100% of their attention, maybe now they'll only have 50% of their attention. It could hurt them on a conversion-rate basis. It will have some negative impact.

BI: One thing about Groupon is that we know that they have 4,000-6,000 employees now. Facebook doesn't have nearly that many people in its whole company. Can they do this? Can they compete with so many fewer people?

VACANTI: No, they can't. If Facebook gets serious about this and it makes sense and they're selling a lot of deals, they're going to want to do their own deals. They're going to go out and hire 3,000 salespeople over the next three years if they really want to compete with Groupon and LivingSocial. I don't think the aggregator model works well enough for them from a profit perspective. The real money is in having their own deals.

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