LivingSocial Under Fire: Can Daily-deal Sites Keep Offering Huge Discounts?

Sept. 17, 2011 — -- "Today only, 84 percent off a massage!"

"Half off all garden tools!"

"47 percent off a family photo!"

If you have half a head for an online bargain, pitches like these in the form of e-mails from daily-deal vendors such as Groupon, LivingSocial, and a growing thicket of competitors are welcome messages in your inbox. Many of the sites simply require registration and, bingo, your digital world – from mobile phone to iPad or laptop – can begin to swell daily with invitations to snap up hyper-discounts on everything from personal hygiene to vacations.

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But as this burgeoning virtual marketplace has blossomed over the past three years, so has criticism. Some businesses have been so overwhelmed by the sheer volume generated by a mass coupon exchange that they have almost been driven into bankruptcy. Other retailers, most recently movie theater owners, have fretted that the scale of discounts available has begun to train an entire generation away from paying a regular price.

It is, on one hand, part of the learning process for industries from retailers to newspapers, who are realizing how dramatically the online world can reshape their business. To some degree, merchants will simply have to adjust to a world in which consumers have more control.

But some observers say that the experience of recent years suggests that the hyper-discounts for which Groupon has become famous might not last. With such discounts so far not creating loyal customers, businesses are finding that smaller numbers of coupons – and smaller discounts – are better for business in the long run.

Big scale is what allowed this market to explode, says Kevin Wray, vice president of NimbleCommerce, which provides services to help businesses tap into the group-buying trend. But small scale is what's coming next, he adds.

Groupon itself has already spun off a smart-phone app that delivers hyper-local coupons on the go.

But by and large, the growth of the industry has relied on big volumes and huge discounts.

"This is the fastest growing business sector I've ever seen online," says John Buchanan, co-founder of Signpost, a self-serve site for companies to offer discounts.

Back in 2009, when he was a freshly minted business-school grad, he notes there were a handful of daily-deal firms. "Now, there are over 500 and counting," he says.

The No. 1 daily-deal site, Groupon, "has gone from zero to several billion dollars in value in the blink of an eye," writes Jeff Weidauer, vice president of marketing and strategy for Vestcom, a provider of integrated shopper marketing solutions to retailers and brands, in a recent blog. Groupon has announced plans to issue an IPO in the near future.

Meanwhile, LivingSocial, one of the next largest, is in 552 daily markets worldwide, according to spokesman Brendan Lewis.

A prime gripe from many merchants is that daily-deal "groupies," grazing for that day's most outrageous deal, don't develop any brand loyalty. From the businesses' perspective, one of the main goals of offering the deals is to drive repeat business, says Terrence Rice, a Milwaukee accountant whose wife used Groupon twice for her business as an aesthetician.

She sold 900 deals, of which some 450 were actually cashed in, but fewer than 20 customers ever came back, in spite of additional discounts offered to the coupon users.