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Why Groupon and Living Social Are Doomed
Nov 30, 2012 8:38 AM EST
Living Social let go of 10 percent of its workforce and Groupon’s CEO narrowly avoided the ax. Have we reached the twilight of the daily-deal business?
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The U.S. economy is growing, ever fitfully and disappointingly. That’s good for business, unless your business happens to be one of the latest tech fads: the daily deal. The travails of the largest and most prominent daily-deal purveyor, the Chicago-based Groupon, are well known: its declining stock price, a history of questionable accounting, and a founder/CEO whose tenure is in question. But Groupon is buffeted by a problem that it and its competitors all face: the daily-deal business just isn’t that great.

Although there are hundreds of companies offering online group-bought deals, the two most prominent are Living Social and Groupon. Living Social, based in D.C., confirmed Thursday that it would be lay off 400 employees, or 10 percent of its total workforce. The “good news” for Groupon this week was that its stock jumped after CEO Andrew Mason said at a conference that “If I ever thought I wasn't the right guy for the job, I'd be the first person to fire myself." Groupon’s board Thursday confirmed that Mason would be staying on as CEO. Groupon, which was declared by Forbes in August of 2010 to be “the fastest-growing company ever, ” now trades at about $4.50—less than a quarter of its $20 IPO price.

Living Social is privately held. But a look at Groupon’s financials gives us insight into just what these companies are up against. Groupon is a tale of three numbers that, when presented in sequence, decline in large magnitude. The first is its gross billings, the revenue it reaps from sales before it pays out refunds to the merchant or taxes, which came in at $1.2 billion in the third quarter. The second is revenue, about three quarters of which comes from the group sales and a quarter of which comes from goods the company sells directly. That was $569 million in the third quarter. The third number is the company’s net loss: about $3 million for the third quarter.

In the beginning of 2011, Groupon’s gross billings of $668 million were growing by over 1, 400 percent year over year; but in the third quarter of 2012, the $1.2 billion in billings today represented a mere 5 percent annual increase. In that same time period, the number of customers who had purchased a Groupon in the previous year rose from 15.4 million to just under 40 million. But the gross billing per customer had fallen by just under 12 percent, from $169 to $149. The year-on-year growth rate of the company’s quarterly revenues has slumped from 1, 358 percent in early to 2011 to 33 percent in the third quarter.

Andrew Mason, founder and CEO of Groupon, attends his company's IPO at Nasdaq on Nov. 4, 2011, in New York. (Mark Lennihan / Getty Images)

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What’s more, it is costing Groupon more in marketing and sales (you need salespeople on the ground to get merchants to participate in deals) to get fewer dollars from each customer. The company’s workforce has been shrinking too. Groupon let 954 workers go in the third quarter and laid off 80 more earlier this month when it announced its earnings. Groupon has just above 11, 000 employees).

Living Social’s financials are more opaque, but because Amazon put $175 million into the company in December 2010, we are able to glean some data. Amazon disclosed that Living Social lost $566 million in the third quarter, although most of those losses were chalked up to accounting items.

Both companies are likely suffering from a few fundamental problems. David Reibstein, a marketing professor at the Wharton School at University of Pennsylvania, was an early daily-deal skeptic. In May 2011 he argued that the business would eventually suffer because merchants would realize that the coupons aren’t a great deal for them. Reibstein argued that Groupon’s customers were likely “price-sensitive, ” meaning they search for the best deal they can find. This means that they are not likely to turn into repeat customers. So the merchants offer a deal, sometimes at a loss, but then get little future business.

This effect has been confirmed empirically by a team of marketing researchers who tracked three businesses for a year after they offered a social coupon. All three companies lost money the month they offered the coupon and will have difficulty earning it back. According to analysis done by the two researchers,
V. Kumar and Bharath Rajan, the companies would need 15, 18, and 98 months (almost eight years) to earn back their lost profits. The reason? “The three businesses had difficulty retaining most of the new customers who were attracted to the coupon offers, ” the two researchers wrote in the MIT Sloan Management Review.
View of the reception desk at Living Social in Washington on June 26, 2012. (Nicholas Kamm, AFP / Getty Images)

To compound this problem, merchants can alienate their existing customers by offering coupons. Take the oft-offered massage or spa treatment. Longstanding customers might feel alienated, insulted, or ripped off if a massage they pay $100 regularly is offered for only $50 to a newcomer. Reibstein told The Daily Beast that “nothing irritates people more than finding that they’re paying a premium over what other people are paying.” Even those customers who were perfectly willing to pay the full $100 price for a massage could get a Groupon instead, making the spa take a loss on a customer who was willing to pay full freight. “The last group you want to offer coupons to are your existing customers“ Reibstein says.

Furthermore, Reibstein speculated that Groupon and its ilk would only do well in a weak economy, “The Groupon business model works better during a recession than it does during a vibrant economy, ” he said in an interview last year. Although the economy wasn’t technically in recession then, his argument still applies: when a business has extra inventory—say, a beauty salon with unfilled appointments—it will be more willing to discount heavily. But when there’s more demand, higher-quality businesses won’t see the need to offer discounts. As a result, the daily-deal companies will have less compelling offers for their customers.

Reibstein flatly predicted, six months after Google offered $6 billion for Groupon and five months before its IPO, that “there's going to be a lot of money lost in some of these investments”. Today, Groupon’s market capitalization is just under $3 billion. Maybe you’ll get an email soon to get some of its stock at a discount. The company’s shareholders might just prefer a massage.

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Matthew Zeitlin is a reporter at Newsweek Daily Beast

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By Daniel Kehrer
Founder, BizBest.com

Unsatisfied business owners are starting to abandon daily deal sites such as Groupon, LivingSocial, Travelzoo and BuyWithMe and may not return in sufficient numbers to sustain such sites in the future. That’s one key take-away from the most exhaustive study yet done on the daily deals phenomenon.

The study by Rice University business school professor Utpal Dholakia analyzed the performance of daily deals offered through five major sites in 23 U.S. markets. It examined the results local businesses achieved on the deals they offered over an 18-month period.

Overall, the picture isn’t pretty. Most small businesses that have been making discount offers on Groupon, LivingSocial and other sites either don’t track the actual financial results of their offer, or have a distorted view of what’s really happening. Several Rice University studies show that most offers are not producing great results.

As small business owners look closer at how deep discount deals offered online are affecting profits, two things may happen:

The daily deal websites will have trouble attracting enough local businesses to fill their deal pipeline; and
Business owners will be able to demand a higher revenue share, lower fees and more services.
Some of the study’s findings seem rather positive. While 27% of businesses said they lost money, and 18% broke even, 55% said they made money. About 80% of deal buyers are new customers (a good thing); and a stunning 1-in-5 consumers who buy a deal never redeem the voucher they’ve already paid for. While this may be the primary way many businesses are turning a profit on their offers, it’s not much of a business model.

Crafting a discount deal that actually benefits your business long term is tricky. Most small businesses don’t get it right. And the Rice University study uncovered a number of troubling red flags that point to structural weaknesses in the daily deals business model in general. For example, two big things that local businesses bank on when deciding to post a deal are these:

That deal buyers will spend at least a little money beyond the deal value itself; and,
That many of the deal-buying customers will return at some point for a full price purchase.
But things aren’t quite working out that way on either count. According to the research, just one buyer out of every three spends anything beyond the basic discount deal price. Even worse, less than 1-in-5 (19.9%) return later to make a full-price purchase.

Salons, spas, bars and restaurants – the bread-and-butter businesses for Groupon – seem particularly disillusioned with offering online daily deals. Only 35.9 percent of bar and restaurant owners said they’d do it again, while 41.5% of salon owners would run another such promotion in the future.

If you do plan to proceed with a daily deal offer, are some things to consider:

Try offering a daily deal of relatively high face value (say, $50 or more) with a shallow discount (at most 25% off face value), a short redemption period (90 days or less), and a limit on the number of deal vouchers consumers can buy.
Among industries, health care, professional services and special events have been most successful; more than 70% made money. However, two of the largest industries – restaurants/bars and salons/spas – don’t perform as well. Only 43.6% of restaurants surveyed earned a profit from the promotion, while 53.7% of salons and spas made money.
Most importantly, don't cut your other advertising and marketing spending to do daily deals. "Many local businesses that are spending their marketing dollars on daily deal sites have dramatically cut their ad budgets, " Dholakia says. "This is a problem because they're not building their brand when they discount their products and services. Only about 20% of customers using daily deals return to buy at full price, but customers acquired through other programs typically have much higher rates of full-price repurchases."
Copyright © [protected] BizBest® Media Corp. All Rights Reserved.

Daniel Kehrer is Founder & Editor of BizBest (www.bizbest.com), a free and independent information service for small business. Twitter: @BizBest © 2011 BizBest Media®

Harrison Mitchell is a local here in Utah who scam both businesses and customers out of thousands of dollars. It is a known fact that he runs an online Scam called Groopdealz.com. He makes businesses put there products online and waits for them to be successful with a cap, once he knows they will succeed he goes direct to the manufacturer and cuts the business out.
He has also been know not to pay his businesses even when they do sell on his website, he makes up all sorts of excuses that he s broke, they had refunds or he's Fishing and he will get to it soon.
Harrison Mitchell is one of the worst Local Scam artists we have seen in years.
If this guy doesn't smoke and a deal weed then I'm Walter Cronkite!

I found this link online about a lawsuit filed against groopdealz.com & its owner Harrison Mitchell. It reads that groopdealz didnt pay one of there vendors for some products or services. I know that groopdealz uses its vendors to proove products will sell and then they find a manufacturer and cut you out. Basically making you take the risk before they do. I just feel bad if they are no starting to not pay there vendors, we barely made anything on our deal. Here is the link i found on a Etsy blog, hopefully it can help other vendors not get taken.
http://www.free-press-release.com/news-groopdealz-being-sued-assets-and-accounts-have-150-000-lien-1347992557.html