Daily Deal Sites Mean Everyone Wins
The business models used by daily deal sites such as Groupon and LivingSocial are sustainable because they offer value for all parties. Pro or con?
Pro: Who Doesn’t Love a Discount?
Daily deal sites have exploded onto the scene, and the market and data show that these businesses have the backbone for long-term sustainability and growth.
In terms of the market, it is extremely rare for Amazon, Google, and Facebook—three of today’s most influential technology companies—to all venture into the same exact new market. Yet each has launched daily deal offerings, validating the business model’s sustainability.
On the consumer side of the market, the data point toward the same trend. According to eMarketer, almost 88.2 million people, or half of all U.S. adult Internet users, will redeem an online coupon in 2011, and this number should increase to 96.8 million by 2013. The point is simple: Consumers are always going to search for a deal, and this demand is not diminishing.
Last and most important, despite the media’s trumpeting of Rice University professor Utpal Dholakia’s attempt to cast doubt on the merit of daily deals, his research contains data showing that daily deals are a reliable platform for acquiring users and additional revenue. His customer behavior metrics state the following:
79 percent of customers (who purchased a daily deal) were new;
36 percent of deal users spent beyond deal value; and
20 percent of deal users became repeat buyers.
When these businesses put together a precise, wisely created deal, they will ultimately be able to increase their revenues. In the end, when this is repeated, both merchants and consumers are happy, and ultimately this will fuel the daily deal businesses’ long-term growth and sustainability.
Con: Pitfalls Abound
Two analogies come to mind when I think about Groupon and LivingSocial: "churn and burn" and "pump and dump."
"Churn and burn"—a term conventionally used to describe the actions of stock brokers who inflate their commissions via excessive trading—refers to the relationship with merchants. Although daily deals can work for a few categories, many business owners will find that deals are unprofitable. Take restaurants: In a typical deal, a restaurant will see less than 25 percent of its regular price. Given that cost of food alone is 30 percent of a restaurant’s price, that is a guaranteed loss. To add insult to injury, restaurants will find that 40 percent to 60 percent of customers they "acquired" during their promotion were already customers. Many of these people would have come in at full price; instead, they’re coming in at a loss. Promises of a steady stream of repeat visits from new customers rarely materialize. To be successful in the long term, daily deal providers will have to show sustainable value for their customers.
"Pump and dump"—the practice of artificially boosting the price of stock—relates to investors. One of the scariest things about Groupon’s S-1 is the amount of money insiders have taken out of the business. In the past two rounds of financing, the company raised $1 billion from new investors. Roughly 80 percent, or $800 million, went into the pockets of earlier investors. The S-1 also glosses over high customer acquisition costs and declining purchases per subscriber in established markets.
Buying Groupon stock could be as bad a deal for investors as running a Groupon is for many merchants.