The real deal on E-coupons

In a dull, grey building in a narrow lane in the urban village of Gautam Nagar, New Delhi, is a yellow sign that says: “Tattoos by Mohit”. In the studio, tattoo designs adorn the pink walls. It’s noon on a weekday, but 38-year-old Mohit Khanna has six customers waiting to get inked—the busiest afternoon in his five years in this business. When he started out, Khanna made Rs 50,000 a month. In February, he made more than 10 times that. The reason for this success: the Internet.

In the first half of February, Khanna offered a 3 square inch tattoo for Rs 289 on Snapdeal.com. He got more than 600 takers in three days, most of them new customers. By mid-February, he was working from 11 a.m. to 11 p.m. The discount was huge, but Khanna is betting that the addictive nature of body art will bring the newbies back for higher priced tattoos.

The sudden rise of deal-a-day websites in the country—DealsAndYou, Koovs, Mydala, SnapDeal, and Taggle—offering up to 95% off, has opened doors for small businesses. This is remarkable in a country where e-commerce has mostly meant travel reservations. Many sites are working hard to augment their online presence with a strong mobile play. The mobile subscriber base is roughly 14 times the Internet user base of 51 million, according to the Telecom Regulatory Authority of India.

Some sites have attracted substantial private equity investment. For instance, SnapDeal has got $12 million (Rs 54 crore) from Nexus Venture Partners and IndoUS Venture Partners, and Taggle has got $8.5 million from Battery Ventures and Greylock Partners.

The logic is simple: Some revenue is better than no revenue. E-coupons offer inventory or time that would have otherwise gone to waste. For instance, a discounted restaurant meal brings in more money than an empty table. The concept works better when the perishable commodity is time—for instance, dining, personal care, entertainment, and travel—than for manufactured goods. Profits are shared by the vendor and the deal website, with the latter getting as much as 50%.

The spotlight is on these sites in India, more so because of the entry of Chicago-based Groupon, the world’s largest couponing site, which many believe may be the fastest growing company anywhere, ever. Groupon quietly
entered India by taking over Kolkata-based Sosasta.com
in January for an undisclosed amount.

Born during an economic recession, Groupon gained from vendors’ desperation to sell, and customers’ compulsion to spend less. The company has revenues close to $2 billion, and 50 million subscribers.

Former Google engineer Ananya Bubna, who was CEO of Sosasta.com and now heads Groupon India, says he plans to position Groupon at the high end of the couponing spectrum. For example, in the product space, deals would be on the latest mobile phones, rather than older models (which is the usual practice). He refuses to say how much of the $950 million that Groupon got from various investment firms in January this year will fund the push in India.

Groupon’s first battle here is likely to be for a domain name. Groupon.in and Grouponindia.com belong to a social commerce site called—hold your breath—Groupoff. Then, Groupon will have to beat current market leader SnapDeal, which belongs to a Delhi-based company called Jasper Infotech. Kunal Bahl, CEO of Jasper Infotech, says: “In recent years, there’s been a lot of investment in retail and services, and we figured a lot of excess capacity was going to be built. It gave us the early mover advantage.”

In his six-year stint in the U.S., Bahl helped launch a detergent called Dropps, which succeeded on the back of a couponing campaign. He was sold on the model, and wants to replicate it here. Selling through SnapDeal are more than 50,000 retailers in over 50 cities across five countries. Local deals are offered in every city.

Being a private company, SnapDeal refuses to share revenue figures, but Bahl says it’s making a profit, and spent Rs 7 crore on advertising in the past year. The company says it gets nearly 750,000 visitors daily, and adds one person every seven seconds to its member base, which was one million in mid-February.

Taggle.com founder John Kuruvilla saw the potential of couponing in 1999, when he serviced a consumer goods group-buying client called BuyAsOne, for his then employer, advertising agency Lintas. “In the first month, even with the country’s pathetic internet and credit card penetration back then, we did close to Rs 45 lakh of sales.”

Kuruvilla, who moved on to Air Deccan and introduced the Rs 500 ticket, was fascinated by the Internet’s potential to attract people to deals in droves. All this led to Taggle.com, which is now six months old. “People think it’s easy to do this, and many are playing the valuation game,” he says. “But to be a serious player, you need to invest time and money. We spend a lot of time understanding the consumer. In India, I believe the Internet will leapfrog to the mobile and the tablet soon. We need to get ready for that.”

Bahl says: “There’s approximately $100 billion worth of spends on discretionary retail services in India. If we move even 1% of that online, it’s a $1 billion market. It’s around $20 million now, and growing fast.”

Brand consultant Harish Bijoor adds deal sites are benefiting from the democratisation of e-commerce in the country. The credit, he says, goes to travel sites such as Irctc.com and Yatra.com, which eased Indians’ wariness about online transactions. Add to that the fact that the culture of eating and drinking out is becoming more commonplace. Couponing sites let young people live within their monthly budget or allowance and still go to a spa.

But the sailing is not all smooth. Going hyperlocal—and this is where couponing best differentiates itself from other ways of attracting customers—is important in a country where people won’t travel two hours to the next town in pursuit of a deal. In such a scenario, a mobile phone’s location capturing abilities let a company push a deal depending on where the owner of the phone is. 3G would make payments easier, and although it hasn’t exactly set the airwaves on fire, PricewaterhouseCoopers projects that there will be 107 million 3G subscribers by 2015.

A couponing company needs a strong sales force to manage relationships and build new ones. Still, the entry barrier in this industry is low—all it takes is a website, and a merchant willing to offer a deal. This has resulted in a number of Groupon clones. Alok Kejriwal, e-contest pioneer and founder of the 2Win Group, which does online advertising among other things, says e-coupons are most successful in markets where consumption is impulsive.

There’s also the question of vendor quality. Deal sites can’t control the actual experience of what they sell, so vendor selection is important. Gaurav Kachru, chief executive of the Smile Group, which runs DealsAndYou (which is part of Group Buying Global AG that runs similar sites in seven countries), says the opportunity for small vendors lies in viewing deals as a way to create long-term relationships, rather than as an incremental sales medium.

Saying no to $6 billion takes more than guts—a bit of madness, maybe. When Groupon snubbed Google’s takeover bid in December 2010, it sent a signal to the world about the potential of couponing. As the likes of SnapDeal figure out how to swing the play in mobile, penetration will increase. And, for these companies, so will valuations.