No big deal after all: High-flying “Daily Deal” companies crash to earth.

Groupon hits the skidsI’ve blogged before about the rapid rise of so-called “daily deal” online coupon companies. But from the get-go, there were nagging questions about the long-term viability of these social couponing programs. One particularly foreboding indication was how few vendors return after trying their first campaign.

… Something about making money (or not) on these deals and whether (or not) couponers would become repeat customers.

A bit more time has gone by since that blog post, and today the news about daily deal sites looks pretty grim. In fact, Groupon, the market leader, has just reported another quarter of poor earnings due to the stagnation of its core business activities.

Groupon also reported that the average revenue per “active” customer (one who has purchased a deal from Groupon within the past 12 months), declined more than 15% … to ~$64 from ~$76.50 a year earlier.

Groupon’s stock price is also way down; it’s now ~$2.75, nearly 90% below its share price when the company went public barely one year ago. Consequently, the company’s market value has shrunk to ~$1.8 billion, compared to ~$13 billion when it went public.

The situation is much the same over at Living Social, Groupon’s most significant competitor. Its part owner, Amazon, just reported a quarterly loss for the previous quarter after it wrote down its investment in Living Social.

What’s the reason for the dismal turn of events? Maybe it’s that the business model for these daily deal programs is … fundamentally flawed?

While at first blush, daily deals seem like a great way for smaller businesses to generate awareness, marketing buzz and attract new customers, it comes at a price: sacrificing the profit margin.

Indeed, the price promotion aspects of the business model are pretty problematic. In the “bad old days,” local and regional merchants used Yellow Pages advertising, perhaps supplemented by the occasional Valpak® coupon mailer.

But typically, Yellow Pages advertising doesn’t have a discounting component. Groupon and other daily deals do … in spades.

Because a daily deal doesn’t “take” until a sufficient number of people avail themselves of the offer, the deal needs to be lucrative enough to attract consumer volume … which is what makes this type of program a challenge for businesses to do over and over again.

And now, new research published by Raymond James & Associates proves the point. This consulting firm surveyed ~115 merchants that had participated in at least one daily deal promotion during fall 2012. It found that ~40% of the merchants would “not likely” run another such promotion over the next 2-3 years.

Why is this? The commission rates on these deals are high, for one thing. But also, merchants found a low incidence of return or repeat customers gained through the promotion. Conclusion: Daily deal customers come for the discount … and leave thereafter.

Other survey findings? How about these:

  • ~32% of the merchants lost money on their daily deal promotion.
  • ~40% feel that daily deal promotions are “less effective” than other forms of marketing.

Rakesh ‘Rocky’ Agrawal, a social media specialist and consultant, is blunt in his assessment of the situation: “I’ve always maintained that this is a hype-driven business built on an unsustainable business model – both for the merchants and for Groupon.”

So what’s the solution for Groupon and other social coupon programs? After all, it now seems clear that many merchants won’t be returning for new campaigns anytime soon. We can see the potential pie shriveling up before our very eyes.

In response, Groupon has begun expanding into a more traditional discount online retail operation (Groupon Goods). In fact, this endeavor now accounts for the bulk of the company’s recent revenue growth.

But there’s absolutely nothing new or extraordinary about this venture, as it just mirrors dozens of other sites that do the same thing.

One thing that does differentiate Groupon from other online merchant sites is its hefty sales force of “live people” interfacing with merchants and businesses – something only social networking and user review website Yelp! comes close to matching. For smaller businesses, the human touch is important when dealing with newfangled marketing concepts.

On the other hand, it’s also a costly differentiation that doesn’t tend to scale well – except with more human bodies. So there’s a palpable concern that Groupon will be unable to deliver these other services profitably compared to more technology-oriented competitors.

Returning to the daily deals component, Groupon and others are also facing the reality that they need to offer merchants a bigger cut of the promotion dollars. They’re also finding it more lucrative to push “perishable inventory” deals (e.g., at restaurants and hotels) where big discounts might make more sense for merchants compared to those for durable products.

All in all, Utpal Dholakia, a professor of management at Rice University’s Jones Graduate School of Business and a close observer of the segment, sees no easy answers. “The heyday for daily deals are behind us,” he concludes.

4 thoughts on “No big deal after all: High-flying “Daily Deal” companies crash to earth.

  1. Maybe there is a sort of tangible reason for this dismal news:

    Let’s say I am a cabinetmaker and I buy wood, have my few machines, rent or own a shop, have a family to support (or even just me) and I make a cabinet, or a dining table and six chairs.

    And let’s presume, you want a dining table and six chairs and you have certain means which to spend on procuring such a dining table and six chairs.

    How much margin is there between your budget for a dining table and six chairs and my costs for shop rent, the tools, the wood, and the yield I need to derive from several days’ work?

    How many people who produce nothing can I support with my work, a trade I learned (I really did!), my creativity, my life energy? And how many people who produce nothing can you support in the process of obtaining a dining table and six chairs from me by way of the resources you worked for, for, let’s say a week or two, depending on your trade?

    While the answer is predictably “This is not the world we live in.” that answer may actually be inaccurate. What Jesus did at his wedding, i.e. multiply bread [aka “dough”] and wine, was a miracle. In our everyday reality, resources [aka “dough”] do not miraculously multiply.

    Which is why I had to give up making table and chairs.

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