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.

Social Couponing and “Daily Deal” Sites: Storm Clouds on a Blue Horizon?

Daily deals and other online couponsI’ve blogged in the past about the risks and rewards of social couponing. Recently, we’ve been getting some conflicting reports about the online couponing phenomenon.

On the positive side, according to a new market forecast by local media expert and advertising firm BIA/Kelsey, American consumer spending on coupon “deals” – including daily deals, instant deals and flash sales – is expected to grow at a healthy compound annual growth rate of ~37% between 2010 to 2015.

That would mean that Americans will be spending ~$4.2 billion in this segment by 2015. And that’s an increase of ~$300 million over BIA/Kelsey’s earlier 2015 forecast, released by them just this past March.

The BIA report also makes the following observations and prognostications about the segment:

Groupon and LivingSocial – the leading players in this market – have expanded rapidly. With low barriers to entry, more participants have entered as well, including vertical sites and local media companies.

 There’s been substantial growth in the number of registered users who are active in buying coupons.

 More specialization in deal sites – by market segment and by geography – is leading to more activity by registered users.

 An increase in both the number of transactions and the average price per transaction will occur.

Counterbalancing this rosy report is the experience of market leader Groupon in its attempts to take itself public. That endeavor has been accompanied by the release of financial figures that show company performance well below expectations.

And the challenges go well beyond Groupon: The Wall Street Journal’s Shayndi Raice is reporting that a shakeout has already begun among the ~530 daily deal sites that have been formed in recent times. So far in 2011, nearly one-third have shut down or been sold (~170 of them), according to daily deal site aggregator Yipit. Even sites like Yelp and Facebook have pulled back from their daily deal coupon activities.

According to reporter Raice, at the root of the challenge is the cost of acquiring registered users for the couponing services. At the outset, the novelty of the segment and the resulting PR buzz made it relatively easy to attract “early adopter” consumers and participating merchants, so only a relatively modest sales promotion budget was needed.

But, Raice notes, “It now takes more spending to get to remaining consumers and to cut through the noise created by so many competitors.”

Groupon’s own statistics from regulatory filings in connection with its bid to go public illustrate this dramatically. Here’s how the average cost to acquire a new custom jumped over the span of just one year:

 March 2010: $7.99 average acquisition cost-per-customer
 June 2010: $20.93
 March 2011: $30.74

Groupon was forced to spend nearly $380 million in marketing initiatives during the first half of 2011, compared to only around $35 million a year earlier. In the heightened competitive environment, not only must companies vie for new consumers, they need to sell new merchants on the program as well.

Those marketing and selling requirements translate into nearly 1,000 Groupon sales employees in North America alone, while second-ranked LivingSocial has ~700 … each of whom earns an average $100,000 in salary plus commission.

Considering these daunting dollar figures, it’s hardly a surprise that there’s a shakeout happening, with the less-heeled participants having to exit the market or sell themselves off.

In hindsight, it appears that many entrepreneurs and investors may have been tempted by the deceptively low barriers to entry into the “online deals” coupon game – basically a website … a few merchants offering coupon discounts … and some e-mail offers to consumers. But the real costs come with trying to scale operations so that the individual coupon offers result in sufficient income and fees that will offset the relatively labor-intensive operating model.

Obviously, many have yet to find the sweet spot in this business.

Social couponing: Big idea … but big profits?

Groupon logoThe rise of the Internet has changed the way the couponing business operates. Not only are people logging online to find coupons rather than searching for them in the local paper, so-called “social couponing” has also entered the scene. This is where online coupon offers become active only after a minimum number of registered users sign on to them.

Groupon is probably the best-known of these couponing platforms, although there are others active in the field including MyCityDeal, Half Off Depot, BuyWithMe and LivingSocial. [Interestingly the idea of social couponing originated in the People’s Republic of China.]

The concept, as Groupon does it, is pretty simple. It offers one “Groupon” per day in distinct market segments. If a predetermined specified number of people sign up for the coupon offer, the deal then becomes available to all; otherwise, the offer doesn’t take effect.

Groupon makes its money by getting a percentage of the deal from the participating retailers.

In theory, social couponing reduces the risk for retailers, who can treat the coupons as brand promotion tools in addition to offering discounts or freebies. But research carried out recently by the Jones Graduate School of Business at Rice University throws a bit of cold water on this hot idea.

The Rice research, which included ~150 businesses, found that the Groupon campaigns were unprofitable ventures for one-third of them. Furthermore, ~40% of the companies studied stated that, based on their experience, they don’t plan to run another social coupon promotion.

The Rice study measured program success based on two criteria: what portion of customers spent more than the coupon amount … and to what degree did customers subsequently make follow-up purchases without the coupon offer. Those companies that reported their campaigns had not been profitable also reported that only ~25% of the coupon redeemers spent more than the face value of the coupon.

Beyond that, fewer than 15% made a subsequent purchase at full price.

In contrast, firms that reported having profitable promotions stated that about half of the coupon redeemers spent more than value of the coupon, and ~30% of them made follow-up purchases at regular prices.

But even some of these firms were wary about conducting another campaign, believing that the Groupon offer did not attract the “right” kind of customers.

What types of offers did well? The Rice study found that foodservice offers performed best in terms of the quantity of offers redeemed. Other categories that scored relatively well were tourism offers, educational services, salons and spas – but each of these drew less than half the response level that restaurants achieved.

Utpal Dholakia, an associate professor of marketing at Rice and leader of the research study, concluded, “There is disillusionment with the extreme price-sensitive nature and transactional orientation of these consumers.” Dr. Dholakia went on to point out that “they are not the relational customers that they had hoped for, or the ones … necessary for their businesses’ long-term success.”

What’s the caveat for businesses thinking about jumping into social couponing? Such a program may well contribute to a surge in business. But many of these new customers will be price-conscious in the extreme, holding a bargain-hunting agenda above everything else.

Hmmm. Just like the real world.