A Closer Look at Deals, Facebook’s News Feed-Based Answer to Groupon

On Tuesday, Facebook began signing up users for Deals, its answer to Groupon and other group-buying services. Subscribers will receive updates in their news feed and potentially by email about pre-paid coupons and experiences they can purchase. Businesses can work with Facebook’s Merchant Services team to arrange and promote Deals such as discounts on going out to a restaurant, the movies, or a wine-tasting tour.

Instead of being distributed through Pages, stories about Deals will be injected directly into the news feed, allowing Facebook to give them as much visibility as it sees fit. This special ability to manipulate the news feed could give it a big advantage over Groupon, LivingSocial, and other third-party group deal providers.

But there was some confusion when users first began seeing the option to subscribe to Facebook Deals in their news feed. The product was given the title previously reserved for Facebook’s location-based rewards system, now referred to as Checkin Deals, that lets local business offer users discounts for visiting their physical location and checking in.

Instead, the new Facebook Deals is indeed a competitor to Groupon, and doesn’t require users to share their location. Instead, they’ll be able to share the news of their purchase. Facebook can increase at will the EdgeRank, or news feed visibility, of both initial updates about Deals and these user shares about purchases.

This means Deals stories might be seen by an unusually high percentage of users in Deals markets, driving signups and purchases. If Facebook sets the EdgeRank of Deals stories higher than normal Page updates and shares, it could have a major advantage over third-party deals providers who must either use less visible Page updates or buy ads from Facebook to reach the social network’s enormous user base.

Facebook says its initial tests of Deals will be free for businesses to offer, but we expect it to begin charging businesses a percentage of user spend in exchange for the distribution. Facebook could charge the same 30% fee it charges applications developers through its Facebook Credits virtual currency payment system, match Groupon’s 50% fee, or set a new rate.

If it does begin charging business to offer deals, it will be the first time Facebook has directly monetized the news feed (aside from news feed ads that it tested years ago). Since it is selling news feed distribution through the Deal updates channel and earning money for each additional purchase, Facebook has a big short-term monetary incentive to make Deals as prominent in the news feed as possible.

However, users have grown to love the news feed because it shows them what they care about, not ways to spend money. Deals could be both, but Facebook must make sure not to place low quality offers above important updates from friends. Otherwise, it risks reducing the news feed’s perceived value to users, which could negatively impact the site’s long-term engagement rate.

If Facebook can seamlessly blend Deals updates into the feed and make them valuable and social, it may have found an enormous new revenue stream, and third-party group buying services will have serious new competitor.