In 2011, we wrote about how Groupon must fail to save the internet. At the time, there were already some fishy things happening in the Daily Deals segment of eCommerce and more fishiness continues to pop up even today. What happened to the promising future of Groupon and its biggest competitor, LivingSocial?
With Amazon revealing that LivingSocial lost $650 million in 2012, it’s clear that both of the daily deals juggernauts are slipping. It seems like yesterday that Google was getting their $6 billion offer rejected by Groupon. What has changed? Why is the industry failing?
To answer that, we have to look at the business model itself. There are definitely some actual significant discounts associated with daily deals such as the one pictured above. $5 for a $10 Starbucks gift card is a real discount regardless of how you slice it. However, the business models require big discounts to make it the whole system work. To give big discounts, companies have to be willing to take either bump up their prices to fit the deal or take losses. That’s the problem.
All too often, companies will inflate their prices to make it possible to meet the strict discount requirements of Groupon and LivingSocial. A 10% discount won’t hack it on those sites. They want big. Unfortunately, that means fudging the numbers from time to time. This leads to distrust as people start realizing more and more that the deals aren’t always as great as they sound.
The rumors about how daily deals really works started circulating a couple of years ago, not from disgruntled consumers, but from businesses themselves. They were being told by their Groupon or LivingSocial sales reps to make the deal favorable in some way, even if that meant “charging” full retail to get to the discounted numbers. In other words, a store might sell a widget normally for $10 even if the MSRP is $18. The daily deals sites will tell them to put the deal together at $18 with a 50% discount, making them $9. Not much of a deal, but that’s how the system works.
Unfortunately, it’s not working. The reality of bulk buying didn’t turn out to be as lucrative for the seller or as beneficial to the buyer as most had originally believed. The results – lost value, lost trust, and lost credibility. There are still many people that swear by daily deals sites. Google is still considering buying Groupon, though at a much lower price tag than before. There’s something there. They just haven’t put the business model together properly yet. They may never be able to, in which case the death of the daily deals phenomenon that was so promising two yours ago may become a reality sooner than later.