Why Zappon failed
JSE-listed media company Avusa has decided to close its group-buying business Zappon. It believes the deal-a-day group-buying model, pioneered by the US’s Groupon, is flawed but hasn’t ruled out relaunching a reworked model of the service in future.
Groupon enjoyed early success with the model and this prompted hundreds of copycat sites worldwide. Many analysts have called group buying a fad and predicted its demise due to small margins and the fact that the model relies on the hope of repeat business, limiting the sorts of products and services offered.
Despite negative sentiment since Groupon listed on Nasdaq at the beginning of November, it’s performed fairly well. After listing at US$20/share, it’s been moving in a band around $24.
After announcing its intention to start a group-buying site in January, Avusa rushed Zappon to market and launched it in March. Avusa Digital MD Elan Lohmann, who headed Zappon, says that it seemed imperative to get to market early, but that in hindsight this wasn’t the best decision.
“We started with bad tech,” he says. Zappon’s back-end was built by Indian developers for around R30 000. “Our tech let us down and our hands were tied. We had lots of plans; we wanted to create a long-term solution for suppliers, and a loyalty aspect.”
However, the site’s teething problems — for which it received much criticism — resulted in a “backlog of add-ons and fixes”, which saw the site spend its first three months “backpedalling”. Lohmann says Avusa didn’t want Zappon to be a clone, but that the site didn’t have “the capacity, time, investment or aggression to really push it”.
Lohmann says almost all of Zappon’s staff had short-term contracts and there haven’t been retrenchments. He says the venture was an experiment and staff came on board knowing that from the outset. Some staff members have “migrated” to other roles at Avusa, with others taking positions at group-buying sites like budget airline Kulula’s Daddy’s Deals.
“We just didn’t get it right,” says Lohmann on what caused Avusa to call time on Zappon. “It’s a tough space with a great deal of competition.”
He says Zappon say saw early on that there would be a head-to-head battle for Google keywords in the sector and that Zappon “didn’t want to play in that” and didn’t want “to have to buy visibility”.
One of Zappon’s perceived advantages was its enormous existing advertising audience via Avusa’s various print publications and online platforms. But Lohmann says, print has “never been a great channel for online” and that print advertising didn’t drive the expected numbers to the site. Zappon had about 25 000 registered users as of last week.
Groupon has spent a lot of money “buying audience” because it wants to dominate the sector, says Lohmann. Groupon in January acquired SA’s group-buying leader and e-commerce provider, Twangoo.
“We’ve learnt it’s a business with high acquisition costs and the social media aspect hasn’t taken off,” Lohmann says. He says it’s difficult to get people to push others to take up an offer like a discount at a restaurant but that it’s even more difficult to get suppliers on board with the products that people are willing to encourage their friends to buy, too.
“The whole viral aspect hasn’t taken off. You have to have quality deals and we’ve realised that fewer, better deals might be a better approach than a daily deal.”
Lohmann says the model is problematic because it assumes suppliers will offer a discount in the region of 50%, and the site takes a further 25%, leaving suppliers with only 25% – unless they see repeat business this isn’t sustainable because when repeat business fails to materialise one has to chase new suppliers, which often means compromising on the quality of offerings.
Groupon was originally born out of idea of getting to know your city better, says Lohmann. “We haven’t seen that happen in this market. For example, you’re more likely to run a Spur deal than one for a coffee shop in Melville no one’s heard of”.
Lohmann says he expects a large number of similar sites to fall by the wayside as the market and the model mature. He says he thinks the model needs to be reinvented or reworked if it’s going to be sustainable.
The Zappon project was relatively inexpensive and was well accepted by Avusa management, he adds. Avusa realised it was an experiment and didn’t apply excessive pressure. Lohmann says he thinks it’s a good thing Avusa was willing to take the gamble, even if it didn’t pay off.
“We made some mistakes we’ve learnt from, and there were other areas we underestimated, but you only find that out when you do it,” Lohmann says. “It’s important to try things, but it’s also important to know when to put a halt on them.” – Craig Wilson, TechCentral