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The daily deal industry pioneered by Groupon has spawned more than 700 copycat businesses, attracted billions in venture capital, and changed the way millions of shoppers find bargains. And still, things aren’t going so great. Pundits have endlessly criticized the financials of Groupon, which released its numbers to the public in June in preparation for an initial public offering that could be delayed. In August, Facebook shuttered its deals service, joining the 170 daily deals sites that have closed or been sold this year, according to researcher Yipit. “Daily deals have become a commodity product,” Jeremy Stoppelman, chief executive officer of review site Yelp, said earlier this month after scaling back his company’s offers.
That leaves LivingSocial, the second-largest deals site, with the dual challenges of navigating these choppy waters while keeping pace with its much larger rival. To do so, Tim O’Shaughnessy, the 29-year-old CEO of the Washington (D.C.)-based company, is beginning to plot his own course. Like Groupon, LivingSocial began talking to bankers earlier this year to prepare for an IPO. But according to people familiar with the talks, the company is leaning toward raising more than $200 million of private funds in a round that may value it at close to $6 billion, and keep it out of the harsh spotlight of the public markets. O’Shaughnessy declined to comment on the plans. He’s also debuting new twists on the deep-discount model that could help save the company from the sudden stigma attached to the term “daily deal.”
In fact, O’Shaughnessy started getting away from that term months ago. “I would say that it’s actually the ‘local commerce’ space,” he says. Two years after he replicated the model developed by Groupon—asking small businesses to offer bargains on products, blasting the deal to millions of e-mail addresses, and splitting the take with merchants—he’s dreaming up new lines of growth. “We’ve got this great megaphone in every city that we’re in and we’re building out this fantastic merchant network,” he says. “Daily deals might be the right way to connect them sometimes, but there’s a whole host of other products that we could do.”
One example: start moving beyond mom-and-pop businesses. On Sept. 13, LivingSocial offered $20 worth of goods at Whole Foods (WFMI) for $10. As many as 80 people bought the deal every second, making it the company’s fastest-selling coupon ever. In June the site also saw a pop when it offered two tickets to any movie on Fandango.com for $9. Critics speculate that LivingSocial is taking a financial hit on these deals with national partners, and using them as a way to add subscribers to its e-mail list. “The margins in the grocery business just don’t support that size of a discount,” says Rocky Agrawal, a blogger who tracks e-commerce. He estimates LivingSocial paid $18-$20 for each $10 Whole Foods coupon. O’Shaughnessy wouldn’t discuss specific terms, but admitted that the economics of national deals are not the same as local ones. “Working with Whole Foods is different than working with a spa,” he says, adding that more than 100,000 new subscribers joined LivingSocial to get the cheaper groceries.
Restaurant discounts are the second-most-common type of offer on deals sites (after, you guessed it, spas) but a top focus for LivingSocial. To make its service more attractive to time-crunched restaurateurs, the company recently started giving them free iPads and mobile apps that let wait staff scan LivingSocial vouchers without having to fuss with codes. “It’s got to be as reliable as pencil and paper in order for them to make the switch,” says Steve Rice, a LivingSocial product manager who works with merchants.
To get the business of higher-end eateries that have no trouble filling seats at dinner, LivingSocial is helping to produce customized, one-off events for foodies during off-peak times. For the April spectacle of the British Royal Wedding, the company offered a wee-hours viewing party and breakfast at the Mansion on O Street in downtown Washington, complete with champagne and strawberries and cream, for $20. “They don’t usually make money at 4 a.m. on a Friday,” says O’Shaughnessy. David Sinsky, data product manager at Yipit, says the push could help LivingSocial because “high-end restaurants have higher price points and attract a higher-end customer base.”
With such innovations, LivingSocial runs the ironic risk of being copied by Groupon. That’s what happened with Escapes, the forum for discounted stays at luxury hotels that LivingSocial launched in November. Groupon debuted its Getaways business half a year later, and in August took in an estimated $9.6 million, 43 percent more than the $6.7 million generated by Escapes, according to Yipit.
As the rivals track each other, LivingSocial now has one big advantage: the detailed financial snapshot that Groupon released in June. While paging through the prospectus, O’Shaughnessy was most surprised at how unsurprising the numbers were. Both companies let huge marketing costs weigh down their bottom lines because, O’Shaughnessy says, it makes sense to attract hordes of subscribers as early as possible and then wring sales out of them over time. “If you were starting a Web company in 1996 or 1997 you would measure your addressable market in tens of millions,” says O’Shaughnessy. “We measure ours in billions.”
The bottom line: LivingSocial may postpone plans for an IPO and raise private money instead. It’s also focusing more on restaurants and national brands.