3 Reasons Groupon and LivingSocial Have Nothing to Fear From Facebook

Last Updated Apr 26, 2011 4:52 PM EDT

Facebook will finally test its own local deals program. Not a big surprise, as the company had announced its intentions last fall. You might think that the industry would be easy pickings for Facebook, with its reach of customers and existing bounty of personal information. But do Groupon and LivingSocial have reason for concern? Nope.

Running a viable deal program will be difficult for Facebook for a number of reasons. Success depends on good execution, reaching the right people in the right way to maximize the opportunity for deal-offering companies, and deftly handling sales. Facebook isn't ready on any of these fronts.

Getting the message out
Facebook supposedly has 600 million people (though its own press room statistics only claim 500 million active users). Groupon has 60 million subscribers. How could it not be successful by putting deals in front of them? Easily.

First, there's a big difference between people who have signed up for a social network and those who sign up for daily deal emails. The latter have opted in to the marketing program and are therefore receptive. There's no way to tell whether even ten percent of Facebook's users will sign up, and the percentage would have to be much higher to really compete head-to-head with Groupon, because 70 percent of Facebook's active users are outside the United States.

Facebook would need 40 percent of its 150 million U.S. active users to sign on in order to rival Groupon's size. That's an enormous response, even for a well-tuned marketing machine. Which Facebook isn't.

Execution
There's already heavy competition in the deal space and the potential market is pretty much fixed in size. Facebook would have to convince many consumers to add yet another flood of deal offers to whatever they already have streaming into their in-boxes. Not only does Facebook face competition from the likes of Groupon, LivingSocial, and Yelp, but many upstarts in the space will tap such social affiliations as sexual orientation, ethnic background, and even dietary sensitivities.

That could be more effective than Facebook depending on its innate social networking charm. And the company's deals would have to work early on to make its efforts look credible.

In short, the ad-material creative, which Facebook will have to provide, will have to be amazing. Groupon and LivingSocial are known for humorous ads that get people to take action. Facebook? Not so much.

To date, advertising on Facebook has been notoriously ineffective. The top engaged brands on Facebook are largely major entertainment brands, according to BNET's Jim Edwards, and not products or services. It's easy to "like" something. Getting people to lay down cash is something else entirely.

According to daily deals aggregator Yipit CEO Vinicius Vacanti, Facebook needs well-connected users to push offers to their Facebook friends. Some say that Facebook doesn't have the necessarily credibility with its users to promote deals. That's premature. Facebook has all those user likes, and they will become the recommendations (click to enlarge).


Sales
But none of that matters without the third leg of the daily deal success stool, good advertising sales, and that is Facebook's weakest point. Although Facebook has had enough interest among advertisers to fuel a recent 40 percent rate increase, selling to small companies that are unsophisticated about promotions is something else entirely. There's a difference between taking payments from companies that clamor to advertise on the the current hot place and convincing small business owners to buy into promotions that are more substantial in cost.

Vacanti thinks that Facebook will need 3,000 salespeople. That's the number that Groupon has. Facebook currently has 2,000 employees, total. This would mean a 250 percent increase in the size of the company and, more importantly, learning how to incorporate the type of sales organization necessary for success.

Put all three considerations together, and Facebook has a tall hurdle to clear. Could it sell a good number of deals? Probably. Enough to hurt Groupon and LivingSocial to some degree? Sure. Can it dominate this market? Not a chance.

Related: Image: morgueFile user seemann, site standard license.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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