This past week, Fab.com made news once again after its co-founder Bradford Shellhammer stepped down. The departure is a bookend to the ecommerce store’s pivot away from flash sales and into the territory of standard online retail, a la Amazon. In its flash sale heyday, the company raised over $150 million in funding and was valued at around $1 billion dollars. Since the beginning of the year, Fab.com has been going through some rapid downscaling in an effort to be profitable.
Flash sales used to be the next big thing in ecommerce, but somewhere along the line, the business model’s wheels started to fall off. Surprisingly enough, Zulily, an ecommerce flash sale store for apparel designed for kids and mothers, is trying to launch an IPO north of $200 million total value. This seems to be an outlier though, as there’s a lesson to be learned from the Groupons, Fab.coms, Totsys, and the others out there. How did the flash sale business model fall apart?
History of the Flash Sale
The flash sale was pioneered by online retailer Woot.com in July 2004 in a deal of a day format. In addition to browsing the company’s online store, you had a 24 hour window each day to take a special deal or ignore it. The following day, a new item appeared with the same 24 hour sale deadline. The types of items that appeared in the daily special could hail from anywhere in the Woot inventory—from everyday, mundane computer supplies to quality consumer goods. Since then, flash sale-centric websites exploded across the Internet, seemingly multiple ones for every type of consumer industry.
Perhaps the biggest flash sale success story is that of Groupon. Right up around Q4 2010, the company turned down a $6 billion buyout from Google, inspired over 500 types of copycat services, and garnered over $850 million in sales in the United States. Six months later, Groupon launched its IPO with an organizational value priced around $13 billion. Around this time period, franchise tech companies such as Google, Facebook, and Amazon began to flirt with the daily deal phenomenon.
Why Flash Sales Worked
One of the major reasons why flash sales were so effective was that during their heyday, the American economy was still feeling the effects of the market crash. People needed to save up on money as they lost their jobs and struggled to make ends meet. With the flash sale, you have something extremely cheap for a limited time that could provide you with quality entertainment. Instead of splurging money on high tech gadgets and various beauty parlor visits, you instead could treat yourself to a cheap salon day pass or highly discounted consumer goodies. In response to a depleted economy, flash sales made everything fun and interesting again and disrupted the typical brick and mortar or online retailer business plan.
Additionally, because of the sometimes-needed participant quotient for a deal to activate, deals became popular shares across social media. Users would encourage their friends to join in on something for a chance to bond. Factor in a time requirement element for deals, and all of a sudden you have large social media presence.
How Flash Sales Faltered
After a year in the public market arena, Groupon lost about 80% of its stock value. Sales were falling alongside the number of local establishment partnerships that the company had carved out. For the rest of the flash sale market, a large number of the small copycat ones got swept away, though the more established ones continued to carry on, albeit at a more downscaled level.
Several different factors can be pinned to the fall of flash sale sites. Perhaps the biggest one is the shift in consumer behavior. One term that came from this entire craze is flash sale fatigue. As people used flash sale services, they were signed up to the ecommerce site’s email listserv. If you participate in a flash sale on a dozen of different sites, you would receive daily/weekly emails from each of them. Things got pretty crazy for the average email box. Marketing messages started to blend in with each other. Consumers began to tune out when viewing subject headers. Opt-out rates began to climb. People got burnt out from feeling the need to purchase at a discount price all the time. As a result, the number one direct advertisement channel lost its edge.
You can look at the economy’s recovery as another reason for the fall. As people began to go back to work, expendable income once again was on the rise, and along it was retail shopping. The tried-and-true business model received a second breath of fresh air. As a result, there was less fire sale surplus to go around for flash sales. People also began to be more patient with their money and used technology to research products thoroughly before purchasing them. This allowed them to find pricing for items that was on par with flash sales’, without feeling rushed by the daily deal window. Additionally, a number of flash sale ecommerce stores offered less than favorable shipping rates and return policies. These two elements are key in building a loyal customer base and generating favorable word of mouth.
Lastly, the flash sale business model proved unsustainable for those who offered goods services at a highly discounted rate. The reason why many local establishments partnered up with Groupon was that they saw Groupon as a chance to build their customer base. Theoretically, a Groupon customer would be exposed to your services because of the discounted rate, be pleased, and become a regular returning customer, resulting in a long term net gain. The reality was completely different. Many stores lost money because Groupon users would only put down money for the original deal and not return, some businesses had to dip into their own funds to honor the sheer explosion of discounted sales, and customers who did not have their Groupons honored trashed businesses’ Yelp pages to harm their brand. Groupon’s negative effects on local businesses have been well documented on the Internet, and the company began to gain notoriety as a poor business partner.
Shift to the Norm
Flash sale business models have by in large dissipated now. Sites such as Rue La La and Totsy have experienced major downsizing. Others have reverted to more standard business models. For instance, after Groupon’s CEO Andrew Mason was fired, the site shifted to an online coupon model that offers discounts valid for longer periods and also a marketplace for discounted wares. Fab.com, which acted as a social media network before offering flash sales, is evolving again, this time into a standard online retailer outfit. Some sites, such as Gilt.com, are even going back to basics with a brick and mortar storefront.
It’s true to say that flash sales generated a lot of revenue, but for the key metric of profitability, it’s a whole other story. Already, some industry analysis are comparing Zulily’s rise to Groupon’s, and we all know how the latter has turned out. In fact, Zulily just turned profitable earlier this year, despite showing high levels of sales and active customers the year before. Can the company somehow beat the flash sale fatigue, or will it just be another footnote in the big book unsustainable business models?