Six Pixels of Separation - The Blog
June 18, 2011 7:17 AM

The Pending Implosion Of Daily Deal Sites

Be careful if you're thinking that you can replicate the success of Groupon.

While Groupon sets its IPO (more on that here: Groupon IPO: It's Here!), not a day passes without a new (or existing) company trying to replicate the model of offering a daily deal from a local merchant at a radically reduced discount. It's getting a little crazy out there. What made Groupon somewhat unique was that in order to capitalize on a radical deal a certain amount of people had to commit to it. The daily deal platform has now become so popular that some companies are running deals without this reserve. Pushing the business model even further, new platforms like Deal51 are a daily deal meta search engine that lists all of the daily deals for your geographic area in one place. While there is no shortage of people trying to get a deep discount, the volume and flow of these daily deals site will soon reach the point of consumer fatigue.

In the end, if it doesn't work for the merchant, it won't be great for the consumer.

Like any new platform, Groupon (and the other copycat platforms) have their growing pains to deal with. Doing a quick search on the efficacy of Groupon for new business and you'll find a whackload of disgruntled merchants - some of which have a fair bone to pick while others, clearly, didn't know what they were getting themselves involved in. ClickZ posted an interesting article today titled, Only 20% of Daily Deals Users Come Back for Full Purchases, that offered the following pieces of data:

  • 19.9 percent of deal users are returning for full-price purchases at restaurants, bars, salons, and other retailers.
  • 35.9 percent of deals users spend more than the voucher value when visiting a merchant.
  • 21.7 percent of them never redeem the vouchers they've paid for.
  • 55.5 percent of businesses reported making money on their promotions, 26.6 percent lost money, and 17.9 percent broke even.
  • 48.1 percent of businesses planned to run another daily deal promotion, 19.8 percent indicated they would not, and 32.1 percent didn't know for sure.

It's not perfect, but it's still interesting.

Like any other digital platform that has gained traction, we're going to see a slew competitors (like we have today), we'll then see consolidation along with others who will simply give up on the model because it's not producing the results they had anticipated. Then, we'll have the implosion which will result in one or two main players with very different business models (and activity) from what we're seeing today. Consumers - as they always do - will move on to another bright and shiny social object to pay attention to and these daily sites will be a more modern form of couponing instead of the new discovery of local merchants that it is today.

Some may call this cynical. Others will say it's practical. What do you say?

By Mitch Joel


Comments Comments Feed
  • Posted by spydergrrl
    Mitch Joel

    Can you patent that last paragraph and make it into a diagram? It could easily be used to explain *all* business bubbles/ emerging trends. It's nice and clean, and is (obviously) repeatable. Reminds me of stuff we'd see in my biz textbooks (a long time ago) in school.

    Another great read! Must go do my daily scan/delete of today's groupon offers.

    Reply
  • Posted by Ethan Beute
    Mitch Joel

    For the advertisers (buyers of deal programs), a strong brand and a unique and sustainable value proposition win. Competing on price is always a losing approach. Deals seem good for creating awareness and sampling, but they're not a long-term play.

    So where is the repeat business as Groupon, Living Social, the local TV stations, the local newspapers, et al burn through a town selling daily deals? It will take several years to cool off and consolidate. And there's always a portion of the consumer population fired up for deals, contests, discounts, giveaways and all that - so consumers will never abandon deals outright.

    The Click Z results are mixed and somewhat positive (more than half make money, nearly half will definitely do a deal again), so I accept the basic premises of your vision as practical.

    Reply
  • Posted by Kevin Dubrosky
    Mitch Joel

    Interesting article, Mitch. Groupon is a godsend for consumers but a nightmare for vendors. Those stats from that article are incredibly generous, and you don't have to look far for horror stories from retailer that thought they'd give Groupon a try. Someone is going to write a book in the next 6-12 months called "Death By Groupon: How to avoid the discounting death knell", and as time goes by more retailer are wising up to the foolishness of obtaining price-obsessed customers at 75% off. (you must offer at least 50% offf and then split the rest with Groupon) Groupon is an incredibly dangerous promotional tool that is focused 99% on the buyer and pretends to be equally concerned with the seller. I think they will be insolvent and dead in the water in 12-24 months. Mason made the biggest mistake of his business life by turning down Googles offer.

    Reply
  • Posted by Brian
    Mitch Joel

    I look at those percentages - 55% made money, 27% lost money and 18% broke even. Those numbers, in my view, are exactly like the ratios behind existing methods of advertising for small businesses (i.e. newspaper ads, flyers, loyalty clubs, Yellow Pages, Google AdWords, radio, other promotions, etc...) - sometimes you make money with traditional advertising, other-times the advertising costs more to run than the business brought in. And of course, when you run those traditional campaigns, you'll never know what works until you try it.

    When you look at the fact that coupon sites may not have any more chance of being profitable than traditional small-business advertising, I believe that it should give retailers a lot of pause for thought around coupon sites. None-the-less though, the model is "traceable", and small retailers like that a lot. They know how much business coupon sites bring through the door, and that is very valuable for the retailers to know.

    The sites that may provide real value to retailers are the ones that suggest retailers run multiple campaigns that get refined over time to improve results and profitability. Traditional advertisers for small businesses typically throw-up their hands and say "we don't know why your ad didn't work.... sorry." If sites like Groupon can track how many customers redeem, and the factors that influence redemption, small business owners may be willing to invest for the long term.

    Reply
    • Posted by Kevin Dubrosky
      Mitch Joel

      Brian, I agree with you about the traditional advertising comparison. Would you ever advise a client to offer their stuff at 50% off? And spend 50% of the remaining gross revenue on marketing costs to promote the 50% off? Of course it will bring in new clients, but what kind of buyers? And how will I affect the perceived value of your stuff? It's the laziest way to generate sales, and it attracts the wrong buyers, and does so at a loss. Groupon itself is a case study of the foolishness of this approach, with massive losses for the sake of growth. The numbers that Mitch shared on this article link show that they too have been drinking their own Kool-Aid. "Its okay that we lost $350 million, at least were growing!". Really, Andrew? Seriously, this is something that is supposed to make us want to own a piece of your money-sucking discounting machine? And yet, in a wild display of irrationality, some crazy investors with control of hundreds of millions of dollars will see it as a viable opportunity.

      Reply
      • Posted by Brian
        Mitch Joel

        Hey Kevin - It depends on whether I would advise them of that or not - certainly their cost structure would be a key factor - but restaurants and service industries can afford such promotions.

        However, that is not the point. I think we both agree Groupon is showing very significant cracks. What my hope is, is that with coupon tracking, social networking, apps and smart phones that Groupon can provide a service to retailers that works to attract loyal and strong customers to the business over a period of time. This is opposed to their existing plan which seems to simply give a "quick hit" with returns that are as uncertain as traditional advertising options available to local retailers.

        Perhaps Groupon could offer a second campaign to those who signed-up for the first. The deal may be a little less attractive than the first, and it will begin to filter-out the cherry pickers and coupon shoppers. Groupon could simply charge a fee per email sent out for emailing the coupon. This could be done three to four times, with each iteration of the deal only going to those who selected the previous one. Within a while Groupon would own an email list of individuals who have selected a deal four times for a particular store... that would be of great value to retailers.

        Reply
      • Posted by Brian
        Mitch Joel

        Oh, as another idea, Groupon could offer a check-in app on smartphones. Every time you go back to the store, simply check-in, and Groupon could begin to track who is coming back and paying full price. Groupon could promote this check-in feature by saying that every time you check-in, the more likely you are to get coupons from that retailer. In this way, the retailer could begin rewarding loyal customers, or notifying repeat customers of new products, specials... whatever... Groupon would now be in essence maintaining a list of loyal customers for the retailer - and that would be of great value.

        Reply
  • Posted by Sandy
    Mitch Joel

    As a consumer, I have benefited from a lot of the daily deals but felt the fatigue early on from the non-targeted offers to the repetitive deals from the competing vendors. Every time I used a deal, I've always asked the vendor how they found the experience and each time it has been the same-overwhelm, not prepared and most customers are not their target market. I also strike up conversations with people while waiting for services (eg. massage) and how I heard about the place would come up. With the next question being, how much did you pay? You can imagine how alienating it is for existing customers to find out that you are getting the same service for 75% off. As someone who works with small businesses, I am hesitant to suggest doing daily deals for all those reasons. But like you said, there's always the appeal of the latest shiny object and it's hard to resist for consumers and vendors alike.

    Reply
  • Posted by Al Pittampalli
    Mitch Joel

    Groupon used to be about finding the next fun thing in your city. Now it's created an efficient marketplace for consumers, many of them searching for services they were already in the marketplace for. The businesses need to take responsibility as Groupon is still providing a valuable service, but there is certain to be huge implosion, because the model is not sustainable, and the service is not providing results for MANY businesses.

    Reply
  • Posted by Karen
    Mitch Joel

    An interesting read on the legal issues of daily deals. It may hasten the implosion.
    http://techcrunch.com/2011/06/15/daily-deal-consumer-protection-laws/

    Reply
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