January 27 2011|01.41 PM PDT

Who doesn’t want a 50% deal? Groupon, LivingSocial and the Evolution of Deals and Rewards

Category: Loyalty, Retail, SRTags: , , , , ,

by Fonda Chen on January 27, 2011

Groupon has made group-buying coupon sites a big deal (please excuse the pun).

Since 2007, Groupon has increased subscribers to over 50 million, raised $950 million in funding, and snubbed a $6 billion takeover from Google as it plans for a public debut by going IPO later this year (WSJ). The company’s success and easily reproducible technology have, as you’d expect, inspired many copycats. Its 130-some competitors range from lesser-known startups like CoupMe to well-recognized companies like Amazon-backed LivingSocial and initiatives by giants like Wal-Mart and Facebook (Reuters).

So far, excitement about these social shopping enterprises has been warranted. What deal-seeker doesn’t like to take their pick from steep discounts on a huge variety of businesses? And what company doesn’t want to give users what they love?

But will the excitement last? Can businesses benefit enough from sites like Groupon and LivingSocial to make group-buying a viable business model, or is 50% off a deal too good to be true?

First, How Does It Work?

Users sign up to receive free notifications on offers for different daily deals. Most deals include a substantial discount, such as $40 worth of food for $20 at a nearby restaurant. The offer becomes available once enough people sign up for the deal, so it spurs the social networking effect by motivating you to tell 10 friends about it. Group-buying sites buy the coupons from businesses, collect the money from users who purchase them, and split the total purchase amount with the businesses.

Groupon usually takes 50% of the profits from a deal (LivingSocial usually takes 30%) and gives a business the other 50%, so if you buy a 50%-off Groupon, the business gets 25% of what it would receive if you made purchases without the Groupon. The revenue cut that Groupon takes varies with each merchant, but essentially businesses are giving away a good chunk of their profits for the tradeoff of volume and high visibility. Businesses that seek out Groupon as a channel for profit will likely be disappointed, since the deal will not provide the profit margins they’re probably used to. On the other hand, a low return on investment (ROI) is okay for businesses that want to use a social shopping site to get the word out about their products or services, and more importantly, can afford to give the site a try.

Gap’s $11 Million Groupon Deal and LivingSocial’s $13 Million Amazon Deal

Many people want deals with the large, national retailers versus discounts at a local shop. However, big retailers suffer from marking down items and services too much because the scale at which customers take advantage of price cuts can cause the businesses to lose money. This explains why it’s rare for a company like Gap to offer $50 worth of clothes for $25, as it did on August 19, 2010, and why Groupon users leapt at the deal. Groupon sold 445,000 of those deals in its first-ever nationwide promotion and most successful deal to date at that time, sometimes at 10 Gap Groupons per second (Clickz).

While Groupon clearly made big bucks from that campaign, which grossed $11 million, many observers suspect that Gap lost millions. Gap cannot divulge any specifics on the deal according to company policy, but various people independently estimate that Gap may have lost $8 million (Techcrunch).

Following suit, LivingSocial, which had been considered second in place among the group-buying coupon sites, stepped up its game big-time on Jan. 19. It offered $20 Amazon gift cards for $10 each. More than 1.3 million customers signed up for the offer and the deal generated more than $13 million for the Amazon-backed Groupon rival (The Street).

Some consultants say that daily deal offers are a waste of money for national merchants like Gap and Amazon because they don’t benefit from the publicity like small businesses who are highly attracted to Groupon and LivingSocial’s large subscriber bases.

Will It Last?

No agreement currently exists between Groupon and researchers on how businesses have liked their experiences with the site. Groupon claims that 97% of the businesses they feature ask to be featured again. Meanwhile a Rice University study says that 66% of responding merchants found the program profitable, and 40% said they would not run such a promotion again (Groupon blog, WSJ). We know that users love Groupon enough that as long as there are enough businesses to participate, they’ll buy. From the merchant’s perspective, though, better data about past purchases is needed to continue moving forward with group-buying coupon sites.

The Next Generation in the Evolution of Loyalty Rewards

Successful business is not just about getting publicity and moving products; it’s about acquiring returning, loyal, profitable customers. Customers who love their experience at a business not only come back, but also tell their friends, families and co-workers about it. (Do you Tweet or check-in with FourSquare or SCVNGR when you are sipping a latte at Starbucks?)

The next generation of rewards needs to offer a more sustainable business model for merchants. This calls for giving true loyalty rewards — generous and exclusive rewards for the best customers. Just think: if you shop at Macy’s more than any other retailer, don’t you deserve something special for it? A first shot at deeply discounted unsold inventory, a new coupon with every purchases, friends and family deals — something above and beyond the average Joe?

This future generation needs the ability both to track and analyze data and to immediately translate that data into action. That way, businesses can whip out more deals for their loyal customers more often. Websites like Groupon are a huge step up from coupons in newspapers because they reach more people who want the deals sent out; but to create a sustainable way for businesses to dish out great rewards, we need to further take advantage of the way technology can intelligently and automatically sort information for us. I love Groupon’s deals on restaurants, but I would never buy the indoor rock climbing or pet grooming promotions – wouldn’t it be great if Groupon knew what I wanted and only offered me those deals? If Groupon could learn from my interests, I would buy more and they would make more money. I need rewards to grow up from Web 2.0 to Loyalty 3.0.

It’s coming soon. The opportunity for deal offers to be tailored to individuals’ preferences is huge and I’m banking on it.

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