Only one of the two businesses, to borrow from Jim Collins’ book title, is Built to Last. Our money’s on Gilt Groupe.
Much has been said about the Daily Deal phenomenon. When a two-year old site such as Groupon grows so quickly that it is able to spurn an acquisition offer from Google – to the tune of a much-ballyhooed $6 Billion offer – well, we’ve got a new phenomenon called “Social Commerce.”
But, did Groupon “invent” Social Commerce? You could argue about that til the cows come home but here’s a fact: Gilt Groupe has been around longer. It operates in the fashion and luxury brand niche.
And Gilt will “beat” Groupon. We’ll tell you why, but first a caveat.
We’re not defining “beat” as force Groupon out of business. But, in this case, we’re talking about long-term success. Groupon shows no signs of slowing – but we think that Gilt has a better long-term business model. Simply put, Gilt Groupe is Built to Last.
Reason 1: Product. Not only does Gilt have better product, in this case they actually HAVE product. Groupon is nice and all, what with the deep discounts on restaurants and other local experiences. The product they offer, though, is rather virtual. You buy a coupon, you go to the retailer, you take advantage of the deal, you get your stuff – food, services, whatever. Done.
Since Gilt focuses on fashion, they have the advantage of tangibility. Even though you’re not buying a Gilt-branded pair of jeans, you are getting the item from Gilt.
You don’t shop at Groupon – but you do shop at Gilt.
Reason 2: Exclusivity. “Membership has its privileges.” When Gilt started in 2007, it was downright impossible to get an invite. Only members could get access to the deals, and that kept the riff-raff away and also kept “scarcity” as a selling point.
Only 100 of these jeans will be sold. Only 10,000 of you have a membership. Fight for ’em. In…3…2…1.
Restaurants that use Groupon aren’t exclusive ones – they are ones that want to get people through the door and are willing to deeply discount their product to do so. This dovetails nicely to reason 3:
Reason 3: Valuing the Product. Let’s say you’ve got a restaurant and it costs you $50 to produce a meal for two people that you end up charging them $60 for. (20% markup is rich in the restaurant industry, but go with us here.) To work with Groupon, you’ve got to discount that $60 meal to $30. You’ve then got to give Groupon $15 of the $30 that you sell the Groupon for.
(Oh, and if you work with Groupon in the first place, you probably don’t have a handle on what your marketing budget is, so you’re willing to throw money at the next big thing.)
I won’t get into the math behind what it takes to get the people in the seats; but I will say that your restaurant experience better be really worthwhile – otherwise, you have conditioned your visitors to expect your food at half price, and you have soaked yourself in the process.
Meanwhile, back with the fashionistas…It’s widely known that markups in retail are huge. Like, well, sometimes it costs $1 to make a pair of jeans that gets sold for $250.
Since Gilt is dealing with an industry that is used to this – and since Gilt knows that the manufacturers have “stuff” leftover (maybe they ordered too many blue shirts in XL, or whatever) – they can turn the numbers into a win/win/win.
Quick, over-simplified example: Jeans that get sold at a boutique for $250 are probably bought wholesale by the boutique from the brand for $100. The brand itself makes a markup of at least $50 – covering its costs to get the product from the manufacturing floor to their own warehouse.
The brand is also sitting on inventory that must be sold – so if it sits there unused, the value of it keeps going down.
So Gilt approaches the brand and says they’ll buy the items for something north of cost, but south of markup. Let’s say $75 – but with the stipulation that they must move a certain number of pairs of jeans or else there’s no deal. Then, not needing an insane markup to make its “nut,” Gilt goes with a figure of $125 – a deep discount, but still, frankly, an expensive pair of jeans that not everyone can afford.
Win/win/win – jeans brand, Gilt, customer. The first two are big winners – and the customer also gets access to a product that still has cachet – it’s a luxury brand, but at a value price.
Reason 4: Long-term relationship building. I love this one the most as a brand marketer: the way Gilt treats the brands it works with.
Without getting into the vagaries – which you can certainly find if you do a little sleuthing – suffice it to say that every facet of the brand-Gilt relationship is structured as a win/win. From how they pay brands – wiring the money – to how they search for deals that are treated as exclusives (you’ve gotta love that if you’re an emerging footwear maker or make suits) – this is a brand marketer’s dream: a killer relationship with a partner that wants everyone to succeed.
Don’t get me wrong – I’m not saying that Groupon doesn’t want its partners and customers to succeed.
But the proposition to the brand starts off almost immediately on the wrong foot.
Groupon to Brand: “Discount your product at least half, then we’ll talk.”
Gilt to Brand: “What luxury items can we help sell for you in a way that makes everyone a winner?”
It’s not a question of which business model we like better – both are viable, both are built to scale. But, if you had to ask which one is Built To Last – our money’s on Gilt Groupe.