One of the best written fiction in recent times has been Groupon’s valuation at 20 Billion. For a site that spends upwards of $30 dollars to acquire each customer, that’s a lot of valuation.

Does this mean that group deals are a losing cause? Maybe. Here is what I think.

The kind of products or services that get sold in these group deal sites are products & services that have a higher perceived value. If you list a normal shoe and say its actual cost is Rs 11,000 I am not going to believe it. But if you list a massage at a spa and say its actual cost is Rs 7000, I might believe it. And buy it too, if it is available at a discount of say 60%. Let us say, it cost me Rs 2800 which I paid by card.

Now, various group deal sites have various percentages that they take from the merchant depending on their product life cycle. Let us say, the site in question takes 50%….now the merchant is left with 50% of Rs 2800….that is Rs 1400.

Initially, the merchant agrees to this price because he feels he is getting a customer where none existed. Also, he expects the customer to become a repeat user and come back again and pay Rs 7000 next time.

That’s where the problem begins. Sometimes, during the first purchase of Rs 1400, the merchant might even be incurring a loss. Not just a direct loss but there could even be a scenario where he has limited massage tables and has to turn away or put off regular customers willing to pay Rs 7000 per massage because of lack of available massage tables – what I would call an indirect loss.

I would also be mightily surprised if a user who had bought one hour of massage at XX Spa at 40% of the cost price would come back later and pay 100% for the same massage, Because when he had bought the discounted pack itself…he was stretching his means. If he didn’t have to stretch, he wouldn’t be on the deal site.

You may argue that even if the merchant didn’t make money while promoting a group deal on a popular group deal site….it is still fine because it helped the merchant with visibility. Well, I agree. But then I would also ask: “What is visibility without some cash inflow?”

I don’t know if the group deal sites do it on purpose, but very rarely have I seen the same offer come up on the home page of the group deal site. Is it because after 1-2 attempts the merchant realizes that it isn’t helping? I don’t know the answer yet…but it is a distinct possibility. If that’s true, very soon these deal sites will run out of merchants to showcase.

Then, there is another model – the one that Snapdeal follows – which is that of accepting an initial payment of Rs 149 or less and mailing the user a discount coupon which he can redeem at the merchant. In such a model, the user pays the merchant rest of the money when he visits his shop….which makes the merchant a happy man….but the group deal site suffers….because they can’t make more than Rs 100 on a transaction (approximately).

At Rs 100/transaction a deal site has to make 1000 transactions/day to earn Rs 100,000/day. And that makes it to only Rs 30,00,000/month – very little compared to the cash burn required to run Snapdeal.com. When last counted they were a 400 strong company and even if we assumed that the average salary of the 400 people was Rs 10,000/month that’s an resource cost alone of Rs 40,00,000/-.

Needless to say, if Snapdeal were facilitating 10,000 transactions/day then the equation becomes favourable because they end up making Rs 10,00,000/- per day. Though I doubt it is.

Why do I doubt it? Because I once counted the number of transactions that happened on SoSasta.com (Groupon’s Deal site in India) – it was possible because they mention how many deals were bought in the deal description itself – for one whole week. On none of the seven days they sold more than 400 deals. Maybe, I calculated them wrong…but that’s a very weak maybe.