Here are some reasons that come to mind when I ask myself, "why are daily deals businesses unsustainable?"
* Large marketing overhead
* Large direct salesforce overhead
* Daily deal hunters don't become regular customers
* Merchants take a loss on the deals
Merchants take a loss on the deals because Groupon takes a 50% cut after convincing them to reduce prices. Groupon takes a 50% cut partly because they have large "sales costs" in creating each deal.
Direct sales and outbound marketing was initially required because it was a new concept that required educating the market. Now that everyone and their grandma knows about Groupon, I wonder if companies can adopt a new model without such heavy marketing and sales overhead, and try to make the numbers work so that both the merchant and the daily deal company makes a profit on each "deal".
I think the market has established that using daily deals as a "loss leader" for merchants to gain more repeat customers generally does not work because of the clientele the deals attract. But what if the Groupon2.0 business structures the deal such that the deal is offered on a high-margin product that the merchant already carries, takes a smaller cut (say, 20-30%), and offers a "lower margins but higher volume" deal to the merchants?
If savvy merchants evolve such that they proactively seek such companies, or if Groupon2.0 style companies can use low cost electronic marketing methods, something more sustainable may be attainable.
I agree. I'm a bit ashamed to say that, in addition to what you mentioned, I've noticed that companies and stores that I did frequent fairly often that did end up doing a Groupon or similar daily deal, lost more of my business after the fact because I experience the same service for less. Somehow, after getting close to 50% off something I enjoyed, the full price didn't seem as enticing to me.
I do like to support companies and stores that do a good job, but there's the simple fact that in my head I think that the intrinsic value of this service is somehow less after the Groupon style deal.
These daily deal sites can work out great for merchants sometimes. It's not all doom and gloom. An example is described here: http://www.kuow.org/program.php?id=23711
Briefly, a small auto shop offered a $30 oil change for $10 via Groupon. The owner expected to get about 90 takers. He got 2277. He had to hire more staff and buy a second car lift to deal with them all. It took months, and he lost money on the oil changes--but about half of them became regular customers and that made up for the loss and put him overall way ahead.
They also profile a restaurant whose experience (with Living Social) was not good. Their deal was disastrous.
If you compare the two deals, and the nature of the two businesses and the psychology of their typical customers, it makes sense that the auto shop worked out well and the restaurant did not.
Daily Deals are not dead. The model is promising for a variety of businesses and Groupon has it well executed. It also has significant barriers to entry if you don't have a size advantage or experience with cold sales. Groupon's stock might be in the gutter but the company is for here to stay and for a long time. It's possible that there will be a couple of (well financed) competitors continuing to fight for first place, but most of the wannabes have already disappeared.
In addition to the deal hunters that are in their customer base, there are many addicted to this type of purchases. I have quite a lot of anectodal evidence for such behavior, and if you ask around, you'll find many more.
While I agree that the concept of Daily Deals and Groupon as an implementation of that concept are not dead, I still think Groupon is going to struggle.
1) The model is promising for some businesses, but a lot of them end up being one-time customers because the results are so poor. The most sustainable customers are those with high margins and high sales costs - a big market, to be sure, but enough to justify a multi-billion dollar company? I'm not sure.
2) I would be more worried about competition at the local level, which has smaller barriers to entry. Lots of companies (newspapers, tv stations, etc) have existing sales infrastructure for a region and can compete aggressively with Groupon. Add to that a handful of well-funded, competent competitors, and it is easy to see how Groupon's margins could continue to be squeezed.
Is Groupon going to be around for a long time? Probably, but I doubt it will be as a multi-billion dollar company with good growth prospects.
> The model is promising for a variety of businesses and Groupon has it well executed.
Groupon essentially invented payday loans for businesses. The two largest payday loan companies in the US at one point had valuations near Groupons too, until the slow moving legal system eventually caught up to them.
Deal hunters will go anywhere there is a deal. Groupon just moved "going out of business" and "lost our warehouse, all inventory must go!" sales to the internet.
Groupon didn't invent payday loans. "Merchant Cash Advance" loans have existed for many years where merchants who process credit cards can sell a portion of their future credit receipts for immediate cash and the industry has grown substantially year over year. The industry kind of has a scummy tinge to it, but these are merchants who cannot get capital from traditional sources and want to upgrade their retail location or buy some equipment. (or go on a vacation, the funders truthfully don't really care how they use the money)
As with so many companies/business models proclaimed dead, I would hazard a guess that it's not dead yet. Too many people have invested too much in the concept for there to be no attempt to modify the execution while retaining the overall premise. Bidding? Fluctuating discounts a la travel sites? Lower caps on the number of coupons offered? Existing in a different economy, elsewhere in the world?
Someone out there believes in arbitrage so strongly that they believe they can make money for themselves while lowering prices for consumers and creating long-term benefits for business owners. Although I've unsubscribed from Groupon and haven't been excited by some other companies' recent efforts in the daily deal space, I would actually celebrate a successful and ethical daily deal company.
A daily deal site we've been on a few times phoned us today to let us know they're laying off 80% of their staff. This site just raised a massive round, so I'm not sure what the implications are, but the daily deal trend is definitely dying.
I wonder how many people, like myself, decided to stop buying Groupons (and similar products) because of the awareness that it was generally bad for the business for which it was being used. I would rather support my local businesses than save $10 or $15 and feed the monster.
Maybe dead in the US, where I live (Morocco), daily deals websites are growing like weed, and many users "discovered" online payment through them, IMO, they're not going anywhere.
Ok, well, you there in Marocco are having exactly the same situation like we had in US about 2 years ago. And most likely, due to the fact it cost more money to keep the DD business running than it generates profits (todays groupon stock performance, anyone? -27%), you will see the downslide very soon, following the US. We too thought DD aint going anywhere...
I read this article and I instantly thought of patio11 banging his drum and telling people about "pathological customers." This article reads to me like a validation of his viewpoint: building your business model on deal-seeking customers, especially in the small, in the "save $5 to $20" space, is a recipe for disaster.
Slate is so bad, and so concerned with debunking popular opinion, that they're often an inverse leading indicator - in other words, if they're saying something is terrible, it will probably be good in the near future. So maybe now is the time to invest in daily deals sites.
i don't think the concept of daily deals is dead just the middle man version that groupon and its clones have ridden on for so long.
i think companies like scoutmob, tiktok, and pirq are doing a good job in trying to find new sustainable models that are beneficial for both the merchants and the consumers.
* Large marketing overhead * Large direct salesforce overhead * Daily deal hunters don't become regular customers * Merchants take a loss on the deals
Merchants take a loss on the deals because Groupon takes a 50% cut after convincing them to reduce prices. Groupon takes a 50% cut partly because they have large "sales costs" in creating each deal.
Direct sales and outbound marketing was initially required because it was a new concept that required educating the market. Now that everyone and their grandma knows about Groupon, I wonder if companies can adopt a new model without such heavy marketing and sales overhead, and try to make the numbers work so that both the merchant and the daily deal company makes a profit on each "deal".
I think the market has established that using daily deals as a "loss leader" for merchants to gain more repeat customers generally does not work because of the clientele the deals attract. But what if the Groupon2.0 business structures the deal such that the deal is offered on a high-margin product that the merchant already carries, takes a smaller cut (say, 20-30%), and offers a "lower margins but higher volume" deal to the merchants?
If savvy merchants evolve such that they proactively seek such companies, or if Groupon2.0 style companies can use low cost electronic marketing methods, something more sustainable may be attainable.