Technology

LivingSocial's Daily Deal: $10,000 Penthouse Suite


Coupon sites LivingSocial and Groupon are moving upscale from small-ticket items to compete with the likes of Expedia and Gilt City

Bloomberg — LivingSocial heralded a new era last month when it offered a $10,000 coupon for a penthouse-suite package at San Francisco's Fairmont hotel: Daily-deal sites are going upscale.

After getting started on small-ticket items—cupcakes, manicures and yoga sessions—LivingSocial and its larger rival Groupon Inc. are pursuing buyers willing to spend hundreds or even thousands of dollars on travel and luxury goods.

The move upmarket is putting Groupon and LivingSocial on the same turf as travel companies such as Travelocity.com Inc. and Expedia Inc., as well as luxury sites like Gilt City. Daily-deal sites also are trying to grab more of the money heading to Amazon.com Inc. and other e-commerce stores. A typical daily-deal user pays $20 to $50 on the specials—far less than the average of $100 per transaction spent at online retailers, according to Forrester Research Inc.

"We are finding that people move up and down between categories: Sometimes they want a sandwich, and sometimes, a $100 meal," Rob Solomon, president of Groupon, said in an interview. "There's a lot of interest in the luxury category."

That means offering high-end hotel rooms, airfare discounts, cruise specials and wine tastings. In the future, Groupon and LivingSocial also may sell computers, air-conditioning tune-ups and golf lessons, said Peter Krasilovsky, a vice president at BIA/Kelsey, a Chantilly, Virginia-based research firm.

Lasik Surgery

Groupon, based in Chicago, has already sold $499 Dutch bicycles and $2,000 Lasik surgery. LivingSocial's Fairmont deal in February, which offered a 50 percent discount on a $20,000 suite and additional perks, was its most expensive deal ever. The promotion included a one-night stay at the hotel's 6,000- square-foot penthouse and a one-day rental of a Maserati Quattroporte. LivingSocial, based in Washington, D.C., sold 115 coupons for the offer.

By moving into pricier deals, the sites are trying to reach a broader demographic. When it started in November 2008, Groupon was favored by urban college kids. Now it has more than 60 million subscribers in 42 countries, Solomon said. Most are 25 to 50, and many live in the suburbs, he said.

"We started finding deals that appeal to older couples or moms," Solomon said.

Groupon usually takes a 50 percent cut of the offer price, while LivingSocial collects 35 percent. That means big-ticket items can quickly rev up sales. At $10,000 a pop, the Fairmont deal generated $1.15 million for LivingSocial and the hotel.

Established Rivals

The challenge is competing with sites that already specialize in travel and luxury deals. Travelocity, Expedia and Orbitz Worldwide Inc. offer discounts on hotel rooms, airfares and vacation packages. As Groupon and similar sites push into the market, they will probably sell about $267 million worth of hotel rooms in the U.S. this year, said Henry Harteveldt, an analyst at Forrester. That's about 1 percent of total online hotel sales.

LivingSocial aims to gain an edge by touting elaborate excursions called Adventures. A company representative organizes and shepherds customers on trips, such as a $100 snow-tubing outing followed by a visit to a local brewery. By year-end, Adventures will spread to 24 cities, up from eight today, said Maire Griffin, a spokeswoman for LivingSocial.

Groupon, meanwhile, is expanding into airfare. In February, it offered a $7 voucher good for $77 worth of airfare for select flights from Virgin America. The company is working out special arrangements with partners, rather than taking its usual 50 percent, Solomon said.

'Everyday Value'

Travelocity says it can offer more consistent savings than the deal sites. "Our focus is on delivering everyday value to travelers through products those sites can't match," said Joel Frey, a spokesman for the Southlake, Texas-based company.

Orbitz sees Groupon and the like as potential partners, rather than rivals.

"We view them as more e-marketing channels we might utilize," said Brian Hoyt, a spokesman for the Chicago-based company. "Orbitz does a significant amount of couponing already within our own community of customers."

David McNamee, a spokesman for Bellevue, Washington-based Expedia, declined to comment.

The luxury-deals market already has a host of competitors ready to defend their turf. BloomSpot Inc., for instance, focuses on luxury restaurants, spas and weekend getaways, and averages $70 to $80 per offer.

Bloomingdale's Versus Wal-Mart?

BloomSpot has been "multiplying revenue every couple of months," Chief Executive Officer Jasper Malcolmson said. In February, it offered a $6,000 wedding-honeymoon package, including an event coordinator, a cake and wine reception—along with a stay for 10 guests at a 5,000-square-foot estate.

"If Groupon is the Wal-Mart of local shopping, we are the Bloomingdale's," he said. "Bloomingdale's and Wal-Mart don't compete."

So-called flash-sales sites like Gilt City and Ideeli.com strike agreements with high-end merchants to sell a certain number of exclusive items to their members during one week.

Ideeli, based in New York, caters to 4 million women. They have an average household income of $103,000.

"We've sold things in the thousands of dollars," Paul Hurley, founder and CEO of Ideeli, said in an interview.

At Gilt, competition is spurring enhancements to its service, said Nate Richardson, president of the New York startup. "We're all motivated to keep innovating and improving so we can continue to grow," Richardson said in an e-mail.

LivingSocial is counting on a partnership with Amazon to reach more shoppers and gain an edge on Groupon. Seattle-based Amazon led a $183 million investment in the startup in December. The following month, LivingSocial offered a discount on an Amazon gift card.

Groupon and LivingSocial could ultimately expand into everything from autos to insurance, said Sucharita Mulpuru, an analyst at Cambridge, Massachusetts-based Forrester.

"There's only so much money you can make off of $5 Ben & Jerry's coupons," she said. "My husband always says, 'I wish they'd set up a Groupon for BMWs.'"

Kharif is a reporter for Bloomberg Businessweek in Portland, Ore.

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