There’s a shake out going on in the “daily deals” web site business. Nearly one-third of these kinds of sites have shut down in the last year. When Groupon and LivingSocial had taken the market by storm, it spawned over 500 “me-too” sites in the last several years. At first, it was a ground-breaking way to do business. Customers won, sites like Groupon won, and local business expected to win with new, repeat customers. Unfortunately, things haven’t worked out as planned. As with most web based businesses, the long-term viability isn’t as promising as the first several years.
As the “daily-deals” industry has matured, it’s becoming more costly to win new customers and gain market share. The reason being is the space is now so crowded, that no one is truly branded beyond Groupon and LivingSocial. Everyone else is really commodity. For example, last June, Groupon spent an average of $7.99 in marketing to acquire a new subscriber. Today, they have to spend $23.46 to acquire a new subscriber. Overall, Groupon spends $378.7 million a year in marketing. That’s up over $35 million from last year. It also costs more to run a “daily deal” company with added sales force and technology. This is not an industry that you can scale through more technology, even though it’s a web based business. You need feet on the ground selling to local business. It’s a human, intensive venture. Another problem is many people are not turning into repeat customers. This compounds the acquisition cost of getting new customers.
Local businesses, too are finding out, it’s not a very profitable way to gain new customers. Often, many businesses lose money on their deals, hoping to gain new, repeat customers. Often, this doesn’t turn out to be the case. As with the “daily deals” sites themselves, many people are not turning into “regular customers”. It also has a side effect by eroding the business brand by training people not to buy unless you offer a steep discount. That’s not a great strategy, unless you’re WalMart.
One of the main problems these sites realized is they still needed to spend money on REAL marketing. Just because it’s a web based business doesn’t mean you don’t need to spend money on advertising and rely on “free” social media. Mr. Khabbaz started RelishNYC in 2009, but is now out of business. Mr. Khabbaz said that without marketing, it was “impossible” to get new subscribers and he was rarely able to attract more than 20 customers to a deal. He had about 10,000 subscribers when he shut down his sites in April. Not too many competitors can keep up with the spending Groupon and LivingSocial put toward marketing, so, as a result, they get swamped and lost in the sea of “generics”. It takes a strong brand to compete, even in a digital world.
It’s not just the small sites who are finding it a rough going. Facebook has abandoned the “daily deal” game all together while Yelp has slashed it’s staff in half.
What are some key takeaways in all this?
• You still must spend on marketing to keep ahead of your competition
• A strong brand helps you stand out in the a sea of competitors
• There still needs to be a win-win-win (web site, consumers, local business) Unless everyone wins, it just won’t work.