Is LivingSocial’s $20M day the beginning of the end?

January 20, 2011 § 2 Comments

 Yesterday, LivingSocial, the #2 social couponing site behind Groupon, made history by selling over 1.3M Amazon gift cards discounted at 50%, in just 24 hours.  Their achievement trumped their previous record (reportedly in the 14K range) many times over, and also handily beat Groupon’s record set last summer — 445K coupons for national retailer, The Gap.  Taking nothing away from its huge sales volume achievement, there’s a concern that the success these firms are seeing with national deals could forever change the DNA of social couponing sites.

Part of the original allure, from the consumer’s standpoint, was that social couponing sites re-introduced us to the local and independent merchants who didn’t otherwise have an ultra-efficient channel in which to promote their services.  The corner bakery.  The day spa in the shopping center around the corner.  The off (or off-off) Broadway theater.  They promoted local discovery.  And that was good.

But there were inherent challenges with the approach.  For one, the inventory-limiting nature of the “daily deal” may have generated competition and excitement among local businesses, all clamoring for their turn at the front of the promotional line, but it also put a cap on the deal sites’ revenue, driving them to expand as quickly as possible into new markets domestically and internationally.  The one-deal-per-day model also put a ceiling on the commission that a sales rep for these companies could earn.  Another obstacle was that local merchant offers, while often having no trouble reaching the sales volume minimums required to activate the deals, and sometimes far exceeding them, didn’t always appeal to the masses, or at least not at the particular time of the offer.  And then there’s the matter of efficiency, or lack thereof, in the local sales model, as evidenced by Groupon’s run rate revenue per employee ($1B/3,100 = $323K per EE), which is much lower than the last ecommerce company I worked for, which is lower still, than a massively scaled business like, say, Microsoft ($66B/90K = $733K per EE).  You could correctly argue that efficiency isn’t the highest priority for Groupon or LivingSocial at this moment, but if Groupon goes public, as it’s rumored to be planning, or as the category matures, putting downward pressure on margins, efficiency will certainly become a factor.

But national deals, like those with The Gap and Amazon, begin to address these weaknesses in the business model.  LivingSocial’s promo for Amazon grossed over $20M for the outlet, and obviously had mainstream appeal.  And from an efficiency standpoint, the deal site not only got to promote a single offer nationally, it earned press coverage worth millions of dollars more.

On the surface, you can see why daily deal sites would be appealing to the national retailers as well.  Perhaps most importantly, they connect them with consumers who have self-selected as eager to buy.  And much of the discount funded by retailers can be offset through up-selling and cross-selling once they have the customer in the store.  They also benefit from what the industry calls, “breakage”, which is the value of any pre-paid deal that goes unredeemed (an advantage relative to traditional coupons distributed in the weekend circulars, which are pure cost unless redeemed for profitable merchandise).

But do household names such as The Gap or Amazon or Coke or McDonald’s have any problem generating awareness or buzz for offers of the magnitude of the one presented by LivingSocial yesterday?  Wouldn’t you think that if Walmart decided to give 50% off to the first 100K (or 200K or 300K) who show up, posted the offer on their site and Facebook page, Tweeted about it, tagged their paid media, and issued a simple press release, that it would garner the attention necessary to sell out?  Of course.  And they could do this without splitting the proceeds with the deal site.

And yet, that’s not what they’re doing.  Rather, we’re starting to see the big, national brands outsource their daily deal experiments.  To be fair, Amazon, which just invested $175M into LivingSocial, obviously has an ulterior motive to see its new partner succeed.  But you’d think other national brands would be less motivated to hand over the campaign to a third-party, when they could do it effectively in house.  Yet, judging by the popularity of these offers, consumers certainly aren’t discouraging national brands from promoting this way, and sadly, from displacing the local merchants who enjoyed short-lived exclusivity.  Under these circumstances, I see things playing out in possibly a few different ways.

Scenario 1: The major daily deal sites become increasingly “nationalized”, seeking out large sponsorships from major brands, and the revenue and efficiency gains that come with them.  Local businesses are gradually squeezed out of the more prominent deal sites, and are forced into the hands of the second tier, more regionally focused promo sites, which never gain much traction.

Scenario 2: The demand for independent, local offerings remains steady, even in the face of heavily discounted national offers, and the market continues to be too large for Groupon and LivingSocial, to ignore.  They launch flanker sites to handle demand from small businesses specifically, or buy out second tier sites that, time permitting, gain enough steam to become local marketing powerhouses.

Scenario 3:  National merchants, following successful experiments with third-party sites, are convinced of the merits of social couponing and daily deals, but are also acutely aware of their unique ability to drive buzz on a national scale.  They, therefore, pull away from the third-party sites and go it alone, leaving most of the inventory available to the independent merchants, and preserving the local flavor of the original concept.

I certainly hope to see Scenario 2 or 3 take shape.  It’s far more interesting to get a daily deal sponsored by a lesser known, local company.  If I want to research discounts redeemable at the mall, I already know where to go.  Local deals drive discovery, they support local economies, they prop up small businesses, and encourage all of us to try something a little different once in a while (like when I redeemed my Groupon for a tree top zipline tour with friends in the North Georgia Mountains last fall).

After all, that’s what living social is all about.

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