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(An earlier version of this story ran online.)
This holiday season, Josh Neblett, co-founder and chief executive of online retailer GreenCupboards, plans to use e-mail blasts, Facebook (FB) ads, and joint promotions with suppliers to get the word out about his “eco-friendly” merchandise. One weapon not in his arsenal: daily deal coupons. “We did three different LivingSocial deals last fall, and at the end of the day it did not pencil out enough for us to continue,” says Neblett, whose 55-employee Spokane (Wash.) company had sales of $7.2 million last year. “The average net loss per order was significant, and the average customer we gain through our own marketing initiatives repeats business with us at a significantly higher rate.”
Add GreenCupboards to the growing list of small businesses that have soured on daily deals. Companies such as Groupon (GRPN) and LivingSocial make money by selling discounts for restaurant meals, manicures, and resort packages and splitting the revenue with the businesses. An October survey by Manta, an online hub for entrepreneurs, showed that 82 percent of 1,087 respondents do not intend to run daily deal promotions this year. Only 3 percent said such campaigns have garnered them repeat business, while 11 percent said they either lost or made no money on the coupons.
Groupon, the Chicago-based company that pioneered the online discounts, says that of the more than 250,000 merchants it has featured in its coupon deals worldwide, half have reupped over the past two quarters. “Thousands of merchants across the globe will rely on Groupon this holiday season to serve as their local marketing partner during a crucial time of year for their business,” Groupon spokeswoman Julie Mossler wrote in an e-mail. The company reported a $2.98 million loss for the third quarter. Sales were up 32 percent for the period, with just over half of the total—$278.5 million—coming from the U.S. That wasn’t enough to satisfy investors: Shares of Groupon are down 80 percent since its initial public offering in November of last year.
Competitor LivingSocial logged $124 million in sales in the third quarter, almost double the same period a year earlier, according to a memo CEO Tim O’Shaughnessy circulated to staff at the Washington (D.C.)-based company in October. Yet writedowns on acquisitions of foreign daily deal sites yielded a loss of about $566 million for the quarter. LivingSocial declined to comment.
Jennifer Untermeyer, founder of TravelKiddy, a three-year-old Centennial (Colo.) company that sells children’s toys online, says the five promotions she ran on various coupon websites in 2011 entirely wiped out her margins. “We have a 40 percent profit built into our pricing, but we lost a significant amount of money on each deal, so we ended up in a wash position for the year,” Untermeyer says. “Customers who redeemed the coupons did not come back, and more than half bought just the coupon amount.” Some of the daily deal buyers wanted her to honor their coupons after they had expired and berated her on the telephone when she refused. “They asked when I’d offer one again,” she says. “I told them never.”
Brian Horakh, the co-founder of Zoovy, a San Diego tech company that sells e-commerce software to small to midsize businesses, says that judging from what he hears from his customers, the daily deals industry is facing “something of a negative backlash.” Horakh says some of his customers have found ways to incorporate deal coupons into their marketing plans: They use them sparingly to boost website traffic and raise their profiles but negotiate deals that allow them at least to break even on each sale.
Horakh faults the coupon companies for not coming up with a tool that helps small businesses convert one-time coupon users into repeat customers. “There have been a couple of attempts, but no one has come up with that golden goose,” he says. A study by Rice University professor Utpal Dholakia found that only about a fifth of restaurants, bars, and retailers that tried daily coupons have been able to build them into their marketing plans profitably.
Denver Bicycle Café, a bike repair and coffee shop, has done trial runs with LivingSocial and Scoutmob Discounts, offering half-off bike service. But co-owner Jessica Caouette backed off signing on for a full-blown marketing program when she realized her business would be mobbed in the week before a coupon expired. “It would seem to me that these types of daily deals have a place for well-established businesses that can afford the consequences of everyone using them at once,” Caouette says. “But as a small and relatively new business, we prefer to use other means” to give customers discounts.
The bottom line: Many small businesses are backing away from daily deals after the discounts failed to generate repeat business.