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Is Groupon’s Biz Model About To Implode?

05/11/2012

Between Groupon, Living Social, Google Offers and other daily deal sites it is possible to be the most tanned, whitened teeth and massaged person in my zip code.

It appears that both consumers like me and retailers are suffering from daily deal fatigue.

To be valuable to a retailer daily deals need to attract at least one of two types of customers: Those who spend more than a coupon’s face value and those who return after redeeming the deal. But recent research reveals that group-buying services often fail to serve up either kind of customer.

In June, a survey by a Rice University professor polled 324 business owners who ran a daily deal promotion between August 2009 and March 2011. Fifty-five percent of them made money on the deals, while less than a third lost money. Yet more than half of the surveyed merchants did not express enthusiasm about running one again. And 65 percent of the restaurant and bar owners reported that they were done with daily deals entirely. The main reason: Only 35.9 percent of coupon-wielding customers spent more than a deal’s value, and just 19.9 percent of customers returned for a full-price purchase.

These statistics are not particularly good nor do they portend a terrific future for the daily deal business model. Groupon’s much-anticipated IPO in early November, which valued the market leader at $12.7 billion. Now its top competitor, LivingSocial, is reportedly set to close another big round of funding that would put its valuation at around $6 billion. While such nods of approval from Wall Street may offer some validation to Groupon, LivingSocial and the hundreds of imitators their business models have spawned, on Main Street, small-business owners still have their doubts.

The daily deal business model needs to be refined. Here’s why:

As a consumer I buy daily deals infrequently and only from retailers or restaurants I already transact with, know what I want to purchase or would continue patronizing – with or without a daily deal coupon. Ooops! Isn’t that basically the same as a regular coupon or incentive? Why pay a third party like Groupon to bring in the same customers that would come in otherwise? None. And that’s why daily deals need to be tweaked before the concept fades into the tanning bed fog.

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