Two years after the Groupon fever hit Russia in March 2010, Leonid Gluzman, the founder of daily deal site aggregator Zina.ru, recalls the history of this thriving industry and shares its key figures and trends for the future.
This interview is an excerpt from an in-depth research paper on Russian e-commerce that will be released next month.
How many daily deal sites are there in Russia today and who are the leaders?
In Russia, there are approximately two hundred such sites today. The two leaders are Biglion and Groupon Russia, with an approximate turnover last year of 3.8 billion rubles, or approximately $126 million, Biglion being number 1 with 2.2 billion rubles, or $73 million. Then you have a number of rather strong sites, including Vigoda.ru, Kupikupon.ru, Kupibonus.ru and Bigbuzzy.ru, whose monthly turnover can reach 50 million rubles, or $1.6 million.
There aren’t any significant differences in the respective offers found on these sites, except the coupon validity period. Some offer one-day actions, others organize one-month ones.
A few players, not the major ones, specialize in certain sectors, such as discount tour site HipClub. KupiBonus.ru started with a focus on beauty and wellness services, but has expanded its range significantly since then.
The overall market size in Russia amounted to about 8 billion rubles, approximately $266 million, in 2011 and I expect it to grow by 50% in 2012.
How did this market start?
Among the first sites, which appeared in March 2010, were Biglion, Darberry (acquired by Groupon in the summer of 2010), and NadoVmeste. The model was very simple: merchants offered discounts of 50% or more, up to 90%. At the beginning, a certain minimum number of buyers was required, but in just 2 months this condition virtually died out, with collective buying sites transforming into pure couponing.
In Moscow, at that moment, entertainment was very popular, the city was just exploding with it. The markets developed instantly in the regions too. Sushi bars offering a 50% discount were the great hit of that time. There was a dire battle between couponing sites for such restaurants in every major Russian city, with a race to see who would be the first to open a regional representative office in the city.
Not everything went well, though, in this fast start. Offline payment terminals, which were used by many users to pay for coupons, didn’t always work properly. They sometimes absorbed the money without processing the payment. These incidents were not monitored and reported properly to the daily deal sites, who couldn’t properly answer users’ complaints.
How does the business model work in Russia?
Just like in Western countries, coupon sites offer merchants opportunities to bring in big quantities of new clients in exchange for huge discounts, with the hope that the merchant will manage to turn a part of these opportunistic clients into loyal customers. The merchant doesn’t spend anything in marketing and, if it treats its client correctly, can take strong advantage of the deal.
At the beginning, Russian daily deal sites took a 5% or 10% commission, later it went up to 30%, 50% and sometimes even 100%. Today, new and especially sophisticated methods have appeared, when a business, in addition to coupon cost, pays the website for the promotional offer to happen.
We estimate that couponing services make up to 15% of their profit from the fact that people do not use their coupons. Bibuzzy.ru was perhaps the first one in the world to refund unused coupons.
However, some small businesses complain they can neither refuse to work with daily deal sites, nor sustain such cooperation for a long time, with just a few clients becoming loyal.
The first reason why profit may fall is that an offer is incorrectly planned. At the beginning, operations were planned rather accurately with the intervention of sales managers from the site; but now that offers come in massive flows, many merchants from small and mid-sized businesses cannot make proper calculations for themselves.
The second reason is that not all merchants correctly manage the flows of new clients and succeed in converting a sufficient number of them into loyal customers. But the story with tire fitting shows this conversion can work very well too. In 2010, they made an offer right at the start of the season: a 60% discount for a tire change. The only condition was to fill in all the data in the application form. It had a crazy effect. Virtually everyone used his coupon since it was at the start of the season. After that, these clients disappeared, but the next year, in the spring of 2011, one week before the start of the new season, they received phone calls: Do you remember you used a coupon? – Yes, sure – We would like to offer you a 15% discount card. They had an approximate 85% conversion rate.
There are other approaches to ensure profit for all sides. One is to place restrictions on coupon redemption period, as exemplified by Living Social in the US, so that just a part of the coupons are actually redeemed. Another, naturally, is to have lower discount rates so that you can still make some profit.
Are Russian daily deal sites profitable?
The margin usually reaches 50% if you take into account the average commission fee. Regarding net profits, we estimate that virtually all big services currently spend more than they earn. Groupon and Biglion for sure, in their frenetic race to attract the maximum possible number of new users and clients in an attempt to establish their leadership in everything.
The leaders can spend millions of dollars a month or significantly more. It also depends on the season. In 2010, some bought a subscriber for 3 rubles. In mid-2011, some buy for 120 rubles, 40 times more (that’s the most expensive I’ve heard of). The market average is 2-2.5 dollars.
How do you see the market in the next few years?
The market will definitely continue growing, but will be transforming in several directions. First, we predict a boom of mobile devices. You go somewhere, open a mobile application and it shows what’s interesting out there around you. Second, there will be a big segmentation. Players oriented to a particular segment, like travel or entertainment, are currently emerging
Today, Russian daily deal sites reach approximately 10 million subscribers. I expect this number to double next year.
Is it likely that new players appear on the market?
This is very unlikely. Look at Facebook: they’ve tried, it didn’t work. It’s the same sad story with Google. Even Yandex or Ozon, should they try, would be unlikely to succeed. The model itself has some characteristics that just a few people know.
Big M&A deals are not likely either, excepted perhaps with KupiBonus. This company made an interesting move, they oriented themselves to the highest-margin offers of women’s themes and established very strong positions in the beauty, health and wellness segments. Another player, such as Biglion, could be interested in it. But on the other hand, it’s cheaper to lure away and buy the team.
What are the differences between markets in Russia and abroad/in the West?
There are no fundamental differences, except that the Russian market tends to be more innovative in certain aspects. Russia has a complicated situation with payments – as many as 16 different methods – so sites had to process a big number of different types of transactions.
The second difference lies in consumer culture. In the West, people got used to coupons since the 50s, under different forms. In Russia this culture does not exist. Groupon-like services suddenly appeared, teaching us everything right away. It has been a tremendous success so far, with up to 80% of first time online purchases made on couponing websites.
Leonid Gluzman was at the wellspring of group buying and daily deal sites in Russia. In early 2010, he created NadoVmeste.ru, which led in several regional cities, in particular Ekaterinburg and Chelyabinsk, in addition to a strong presence in the capitals. In August 2010, the service was acquired by Veritas Financial Europe, the owner of KupiKupon.ru. Gluzman led KupiKupon.ru until May 2011. He then launched Zina.ru, which quickly affirmed itself as a leading aggregator of daily deal sites.
- RUSSIAN E-COMMERCE REPORT 2012 – The total volume of Russian online retail reached 310 billion rubles, a little more than $10 billion, in 2011, up 25% from the previous year. EWDN’s research study of Russian e-commerce, which includes the full version of this interview, will be available soon. To receive free insights or to order the full version, please contact us at [email protected].
