Why Gilt City Will Succeed

by Jim Moran on April 24, 2010 in Commentary and Daily Deal Industry

The flash sale giant Gilt Groupe has quietly begun testing a local daily deal service in New York, Gilt City. While we think there is room for hundreds of daily deal companies to operate profitably, Gilt City in particular has some compelling characteristics that will cause to be a leader in the space:

Vertical Focus. Conversion rates are critical for daily deal sites. The more deals a user purchases each year, the more valuable that user is, the more the service can spend to acquire users and the faster it can grow. We believe in the opportunity for vertically focused sites in the space because each deal is relevant to a higher percentage of users, meaning a higher conversion rate on any particular deal.

Several successful vertical-focused services have emerged, such as BlackboardEats, SpaSally and Zozi.

Price Point. The high end nature of the Gilt brand allows this service to offer deals at substantially higher price points. Similar to conversion rates, a higher ticket price for each transaction means the user has a higher lifetime value and can thus justify a higher CPA in marketing spend, all else being equal. TechCrunch posted a screenshot of an example Gilt City deal ($95 for a $190 dinner at Rouge Tomate), which hints that we can expect high price points with the service:

As a point of comparison, the mean price point for all other daily deals is $38 (based on 2,238 historical deals we’ve tracked on Yipit).

Exclusivity. From a consumer psychology standpoint, exclusivity can be a driver in the effectiveness of an offer. A deal available only to you and your group can seem more attractive than one that is available to everyone. There is a lot of academic research in this area, one consideration being how strongly individual members identify with their group:

Given that group exclusivity is, in general, positively valued, high identification consumers should therefore more favorably evaluate deals that are exclusive rather than inclusive in nature (Journal of Consumer Psychology 2010, Download)
Services like Gilt City and others that utilize the private/exclusivity approach, such as Village Vines, can see an higher conversion rate depending on the degree to which consumers identify with their fellow constituents.
Installed Base. Audience size is a critical barrier to entry and long term determinant of success for any Daily Deal service. Gilt City’s parent company, Gilt Groupe, has nearly 2 million members, and as Gilt City expands to more metros, many of those can become Gilt City members as well.
We expect other online sample sale players like RueLaLa, Hautelook, and One King’s Lane to experiment with similar offerings as well. But can the online sample sale players pose a serious threat to Groupon, the largest player in the local daily deal space? While we remain confident that Groupon will continue to hold pole position in the space, their April Fool’s microsite, Groupoüpon (a parody on exclusive sample sale offerings) seems particularly well timed, a potential indicator that Groupon was anticipating this new competitor.

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