Do Groupon And LivingSocial Do More Harm Than Good?

Would you buy a $5-for-$10-at-Lioni-Italian-Heroes coupon from this man? Groupon CEO Andrew Mason wants to know. | Photo by Saverio Truglia

A year ago, the calculus of a daily deal seemed simple: A merchant partners with a provider, offers a discount to a large opt-in audience, and then watches its customer base explode. Groupon, unquestionably the alpha of the pack (see sidebar, next page), continued to assemble a portfolio of clients and customers that culminated in 2011 revenues of $1.6 billion, up more than 419% from the year prior. It appeared as though the coupon site and its ilk represented a way to forevermore populate small businesses with a stream of enthusiastic consumers.

But the math is more complicated than that. Despite such robust growth, Groupon lost $256.7 million in 2011, worse than expected. Privately held LivingSocial, which is 31% owned by Amazon, had $558 million in losses on just $245 million in revenue. And they were the fortunate ones. In the last half of 2011, even as Google and PayPal ramped up their own coupon offerings, the world bid farewell to 798 deal sites (7.61% of the industry) due to consolidation and closure. “When any new channel opens, there’s a gold-rush mentality,” says Jay Weintraub, who runs Daily Deals Summit, an industry conference. “We’re in a healthy period of reassessment now.”

Though the daily-deals industry generated almost $3 billion in 2011, the attrition of both providers and merchants is justifiably amplifying questions about its sustainability–as well as who’s at fault for deals gone wrong.

“Not all merchants are savvy in running their business,” says Julie Mossler, director of communications for Groupon. “They don’t have time to harness ROI or understand their customers. That’s where we come in. We don’t think of ourselves as a deal provider anymore. We’re a merchant partner.”

But even as sites switch the focus from sealing deals to helping clients develop lasting relationships with customers, their reach is limited. Notes Tim O’Shaughnessy, CEO of LivingSocial, “Ultimately, it’s up to the merchant to offer a great experience so a member will want to come back.” True as that may be, it doesn’t stop merchants from blaming providers when deals don’t work out. In a January survey by Susquehanna Financial Group and Yipit of past deal-participating businesses, roughly half said they did not plan to do another offer in the next six months. And as the following examples make clear, that restraint may well be the best approach for many of them.