The Art of the Online Deal

 by Carl Weiss

For the past couple of years one of the hottest tickets online would have to be daily deal sites.  The online business of serving up daily deals has attracted millions of online users and spurred dozens of clones of market leader Groupon.  But even the big dog hasn’t fared all that well. Consider the fact that less than three weeks after Groupon went public, share prices fell from an opening price of $20 per share to $14.58.  More recently, the aftershock of Facebook’s announcement that it would soon go public gave Groupon a boost.  This morning’s opening price of $23.51 puts the stock back beyond the IPO price, but not by much.  Still, Groupon is faring better than many of its competitors.  So why is it that the art of the online deal seems to be so elusive?

The premise of offering discounts to members certainly seems like a plus in these tough economic times.  From a consumer standpoint, it would seem that this model should have nowhere to go but up.  That’s not to say that consumers have all been delighted with the services vended by Groupon.  Google “Groupon Complaints” and you will currently see more than 1 million results, many of which lament the fact that the service that was promised by some vendors was not what the consumer received, or was deficient with regard to quality control. In 2010, there was even a class action complaint filed in Chicago.

Of course, as with all deal of the day sites, it is clearly impossible for companies like Groupon and Living Social to police every vendor that signs on with its service.  At least not until after the fact.  Just like any business, to establish and grow a daily deal site it takes money to makes money.  That’s where many daily deal sites have been getting caught in the squisher. 

For example, in the first quarter of 2010, Groupon spent $7.99 to acquire a customer.  By the second quarter of 2011, that figure had jumped to $23.46, nearly tripling their cost of acquisition.  Writ large, this meant that the king of online couponing shelled out a king-sized wad of cash to keep the mill running, spending $378.7 million on marketing in the first half of 2011, up from $35.5 million in the same period a year earlier.  And that doesn’t take into account the cost of sales.

As the market grew, daily-deal sites also had to hire more salespeople to line up coupon offers from local merchants. In 2011, Groupon had 990 sales employees in North America, up from 201 a year earlier.   During the same period, LivingSocial, the No. 2 player in the marketplace, watched its sales force rocket to 700 employees from 191 a year before.  Experienced salespeople do not come cheaply.  Groupon pays sales associates about $35,000 a year before commission, after which their compensation can jump to as much as $100,000.

While the big players in this high stakes game have been able to keep feeding the kitty, a number of lesser known daily deal sites have not.  In 2011 alone, nearly one-third of all daily-deal sites nationwide—or 170 of 530—either shut down or were sold.  Even major players like Google, Facebook and Yelp have either tried and discontinued similar services, or are still playing with the mix.  Other entrepreneurs have seen the industries growing pains as a sign to take action by evolving the business model.

Take Jacksonville’s Value Hound. Instead of offering daily deals that consumers need to look through and select, their business offers a discount card that is good at a number of local establishments.   What’s interesting about this new concept is that it doesn’t require members to clip coupons at all.  All they need to do is present their card to participating businesses and they will be able to take advantage of exclusive discounts.  For the business, this concept offers a lot of appeal as well, since it doesn’t require them to give the consumer as well as the coupon purveyor a cut of the pie, which is another sticking point with the Groupon model.  For instance, if a merchant was to offer a 25% discount ala Groupon or any of its clones, not only would the merchant have to reduce their selling price, they would also be required to pay Groupon a fee equal to the discounted amount.  (In other words, if a merchant offers a $20 item at a 25% discount, after the cost of sale they will only be reimbursed $10 for the item.)  Value Hound on the other hand, doesn’t charge the merchant to participate.  They make their money by selling memberships to consumers.

While the game is tough, the stakes are high and with the economy still on shaky ground, I don’t see this model disappearing in the near future.  Over the long haul, we will see how the concept evolves.  For businesses, the advantaged and perils of these sites must be weighed on a case by case basis.  For consumers, the thrill of getting something for less will always hold a magnetic attraction that is hard to beat either online or off.

If you want to explore this idea in greater depth, go to http://blogtalkradio.com and enter “Working the Web to Win” in the search box to listen to our live online radio show at 4pm February 7.  Or you can go to http://workingthewebtowin.com after the fact to hear our broadcast, plus see a videotaped interview with Value Hound VP Julie Morton.  Carl Weiss’ other sites include http://access-jax.com and http://jacksonville-video-production.com
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