There are few things U.S. consumers love more than a bargain, and the spread of daily deals sites has given them plenty of their beloved and then some. Americans will spend an estimated $2 billion on daily deal sites this year alone — a figure that’s expected to double by 2015.
Merchants, however, are telling a different story. While daily deals sites are helping many businesses attract new customers, turning those new arrivals into repeat customers has proved unexpectedly difficult. Furthermore, consumers aren’t spending over the allotted amount of their deals. Businesses are taking a hit as a result.
What will this growing pattern mean for consumers, businesses and daily deals sites? It’s difficult to say. But this infographic seems to make one thing apparent: Merchants are going to need to turn elsewhere if repeat business is what they’re after.
The online business of serving up daily deals has attracted millions of dollars in venture capital and spurred dozens of clones of market leaders Groupon Inc. and LivingSocial Inc. Now the industry is starting to shake out.
Nearly one-third of all daily-deal sites nationwide—or 170 of 530—have shut down or been sold so far this year, according to daily-deal-site aggregator Yipit.com, including sites with names such as Scoop St. and RelishNYC. Even big operations such as Facebook Inc. and Yelp Inc. that could capitalize on their large audiences to build a daily-deals business have recently pulled back on the service.
The daily-deals business has turned into an “arms race,” with competitors spending money to attract subscribers and hundreds of employees and making it more difficult for other sites to keep up, said David Ambrose, the 26-year-old co-founder of Salesscoop LLC’s Scoop St., which was sold last month to rival BuyWithMe Inc. for an undisclosed sum.
At the heart of the winnowing is the shifting economics of the daily-deals business. Setting up a daily-deals site—in which the site takes a cut of the online coupons it offers consumers—requires just a website, some emails and local merchants willing to offer a discount. But as the industry has started maturing, the costs of running such a business have soared.
In particular, the cost of acquiring subscribers who redeem a daily deal has skyrocketed during the past two years, said executives at daily-deal websites. While snagging early adopters who were curious about daily deals initially required little marketing, it now takes more spending to get to remaining consumers and to cut through the noise created by so many competitors.
There is a way to fix the daily-deals business, but it may be too late for this generation of companies.
By Rob Go, contributor Fortune
Like many people, I’ve been watching the meteoric rise of Groupon as well as some of the negative press we’ve been seeing the last several weeks. I am not privy to any private information about the company, but I’ve said publicly that I admire the founders and the kind of business they have been able to build so quickly.
For the record, I think that Groupon is much more than a deal-of-the-day mailing list. The long-term $20 billion+ potential for this business is not really a mystery — it’s as a performance marketing solution for small businesses. The company should get to the point where they can give small businesses the tools to make very targeted offers to consumers based on demographics, location, past purchase behavior, and other targeting options. You essentially offer the small business yield management and somewhat dynamic pricing. All of these are big deals and are win-win for businesses and consumers.
The price of admission into this opportunity is consumers engagement. Groupon and its competitors embarked on a land grab, amassing as large a list as possible in as many regions as possible. In theory, the larger the list, the better the opportunity for targeting and yield management.
Groupon has fallen victim to the IPO blues. The stormy IPO market claimed several causalities in August, and now Groupon has canceled its roadshow — when it pitches itself to investors nationwide — originally planned for next week. Expecting to receive a $20 billion valuation, Groupon will asses its position weekly before making any further actions. The decision to delay comes just days after the SEC sent a letter to Groupon CEO Andrew Mason saying he had violated SEC rules against public statements leading up to an IPO.
Mason sent an internal email that praised the company and bashed critics that was later leaked the public. Some speculate that Mason knew the email would be leaked.
It’s still going to do some daily deals but it is slashing its deals salesforce by half and focusing away from the product.
This is pretty significant. Yelp has relationships with merchants and a big consumer presence.
One problem is that some people say Yelp has an adverserial relationship with merchants. Merchants can only control comments and reviews on their page if they buy advertising, which some merchants view as a racket.
In any case, Yelp isn’t the only one getting out of the daily deals business. Facebook is shuttering its own daily deals effort, and Google’s doesn’t seem to be going anywhere.
This is a pretty bullish signal for Groupon: everyone’s been saying that the business is vulnerable because it has no barriers to entry and is easily replicable. And yet, that’s not happening. It seems to be the case that running a successful daily deals operation at scale is really a specific, hard thing to do that not everyone can get right, including companies that would seem predisposed to do so.
After four months of testing in places such as Atlanta, Dallas and San Francisco, Facebook has made the decision to ditch its Deals program despite acknowledging that there “is a lot of power in a social approach to driving people into local businesses”.
Facebook’s Daily Deals, a feature similar to that offered by the likes of Groupon and LivingSocial, is no more. This should not be confused with Check-In Deals which presents users with offers when they check in to locations via Facebook Places. Daily Deals – arranged by a sales team with local merchants – were emailed to Facebook users who signed up to the program.
No reason was given for the decision to ditch Daily Deals, but Facebook remains positive, saying “we remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals.”
Vinicius Vacanti, co-founder of Yipit.com, wasn’t surprised to hear of Facebook’s decision saying the Deals product had been “an underwhelming product and experience”.