It turns out that the most amazing discount that LivingSocial would offer was on itself: “Amazon invested $175 million in LivingSocial in December 2010, when online coupon companies were a hot commodity,” reports TechFlash. Now, Amazon has written down $169 million of that investment against its third quarter. That’s 97 percent off! Beat that, Groupon.
Amazon’s investment amounted to about a 30 percent stake in the daily-deal company, which is said to have steered clear of an IPO, though if you grant IPOs conscious agency, you can imagine them steering clear of LivingSocial. Chief Financial Officer John Bax told the Wall Street Journal in June that, “This is a healthy business and a healthy industry. The economics are good.” Amazon would seem to differ.
Groupon stock [GRPN] has soared almost one percent on the Amazon’s valuation of its competitor, to $4.46.
Amazon’s earnings would still have disappointed analysts, who had thought the online retailer would lose only 7 cents a share; excluding the LivingSocial write-down, Amazon lost 23 cents a share (as opposed to 60 cents a share with the LivingSocial discount). The company reported an operating loss of $28 million for Q3. (See their press release here.)
Net sales increased 27 percent over third quarter 2011, and Amazon forecasts net sales growth of 16 to 31 percent in the fourth quarter of 2012, compared with fourth quarter 2011.
The deal site backlash has lashed back: the New York Times went to press with a story on deal sites over the weekend that included everything but a hand-drawn tombstone and the words RIP.
Just a few months ago, daily deal coupons were the new big thing. The biggest deal maker, Groupon, was preparing to go public at a valuation as high as $30 billion, which would have been a record amount for a start-up less than three years old. Hundreds of copycat coupon sites sprung up in Groupon’s wake, including DoubleTakeDeals, YourBestDeals, DealFind, DoodleDeals, DealOn, DealSwarm and GoDailyDeals. Deal sites were widely praised as a replacement for local advertising.
Now coupon fatigue is setting in.
The upshot, as summarized in another context? “Groupon is just payday loans for businesses,” wrote @vouchey (aka Mike Fourcher) on Twitter. And businesses are wising up to the promise that an initial great deal always brings hordes, let alone instils loyalty. “Even the biggest Web retailer, Amazon.com, has had trouble gaining traction in oversaturated New York, where it started offering deals with great fanfare a month ago,” notes the Times.
AmazonLocal's daily deal
Their unscientific survey of responses to Amazon’s Big Apple-centric deals found only one that reached triple digits, an “Asian bistro” that netted 109 buyers. In Seattle, today’s AmazonLocal deal for a month-long exercise boot camp ($200 value! going for $30!) has so far drawn 110 buyers. Meanwhile Tippr, home of the “hottest daily deals in our city,” is offering not one but two trips to a resort in Belize, stretching the meaning of “in our city” substantially.
This doesn’t mean deal sites are always and everywhere a marketing gimmick. But it does tend to underscore the contrarian view to the hype around deal sites: that, employed judiciously, they may work well for select kinds of businesses, but employed indiscriminately, they can do a great deal of harm to businesses without cushy profit margins, or in comfortable cash flow situations. That is, precisely the kinds of businesses who may clutch at Groupon as at a lifesaver.
The “Live Off Groupon” experiment concludes with two briefly noted RIPs of its own:
This post recognizes my favorite overall Groupon restaurants as opposed to individual items featured in my last post. A small distinction maybe, but there were just too many incredible restaurants to fit them all in one post. Unfortunately two of them closed this year, leaving my top 5, of which three are from my home town of Chicago!
That is where Mike Fourcher’s payday loan analogy comes into play. Back in June, when Groupon had just turned down a $6-billion buyout offer from Google (you can’t say Groupon wasn’t drinking its own Kool-Aid), I wrote down an analysis of that easy-money dynamic:
What is the most salient feature of the social coupon, after all? It’s not the coupon idea. It’s not online delivery. It’s not steep discounts. All of these were available before. (Even the massive audience Groupon provides was around in one form or another.) It’s the transposition of the sequence of events (the small business owner and Groupon make a sale…and then Groupon takes the lion’s share). You could call it misdirection: Watch this sale! says Groupon, and the smiling business owner fails to feel the difference, that it’s not really their sale anymore.
Notice that the small business owner still has to take the marketing theory on faith: These customers will return, spending like sailors! (Not that this doesn’t happen–but Groupon’s ability to guarantee conversion rates is not, I suspect, much better than anyone else’s.) So the main thing that has changed, really, is simply that Groupon has deferred charging for this trial-offer form of advertising until that first sale is made. It’s still the small business owner’s money, but it’s associated in time with the benefit of making a sale.
The New York Times quotes Kevin Walters, a restaurant owner who was ruminating over trying another daily deal, after a disappointing start: “I’m in East Harlem. If the rest of the economy is shaky, then East Harlem is depressed. One way or another, I need to get people here.” That “one way or another” reasoning is how people talk themselves into paying rent with a payday loan, but of course, the tricky part is that soon there isn’t another way.
“Local online bookseller” Amazon rolled out their new local deals service, AmazonLocal, in Seattle today, pitching shoppers ” average savings of 60 percent or more off everything from restaurants to spas and events.”
The inaugural deal? 50 percent off food and drinks and games at the Garage on Capitol Hill. (668 purchased as of 12:25 p.m.) At first, says Amazon, shopper will find deals from LivingSocial, but soon AmazonLocal will have their own offers. You can also follow AmazonLocal deals on Twitter and Facebook.
However, Mary Osako, Amazon.com spokesperson, emphasizes that it’s not just the price-point: “It’s about opening up Seattle, our hometown, for exploration. From coffee shops to the arts scene, there are so many innovative businesses and locally-developed services to try out right in our own backyard.”
Yaeger said she likes DealPop because “they’re creating destinations,” using the discount not simply to lure bargain-hunters but to entice people to learn about the businesses in their area.
Right now, AmazonLocal is local to Seattle and Boise, ID, but the interested can sign up to be alerted when AmazonLocal comes to their town. How successful Amazon will be with this come-from-behind entry is up in the air. Is there anyone in Seattle who hasn’t bought something from Amazon at this point? (Employees of local bookstores aside.) Clearly Amazon has an enviable pool of customers; but as Groupon’s ceaseless staffing-up (and Amazon’s riding in on LivingSocial coattails) indicates, it takes a lot of salespeople to drum up daily-deal business.
The monetary value of Groupon is a hot topic as their IPO nears. Some people are pro: “Why Groupon’s Biggest Critics Are Short-Sighted.” And some are con: “Memo to SEC: Groupon Has No Competitive Advantage, Stop Its IPO” (h/t @jontalton). At least one person is calling the social giant a Ponzi scheme.
But, as I’ll get to shortly, I’m struck that Groupon’s case history is enormously valuable outside of social coupon considerations, in the behavioral psychology of markets.
It’s true that competitive social coupon Davids may learn something heartening (or not) from criticism of the Groupon business model: Business Insider reports that just 19 percent of Groupon’s 83 million “customers” have bought a Groupon. Here also is a chart of Groupon’s revenue vs. losses.
So, the social Goliath may not be hard to knock down with the right pebble of value capture. (In Seattle, Tippr has just acquired DealPop from Whitepages.com, perhaps marking, GeekWire speculates, the beginning of a wave consolidation in a wildly proliferating market. We profiled DealPop last August.)
A Rice University study claims 40 percent of businesses who’ve used Groupon would not do it again. Why? Seattle food blogger Ronald Holden has written extensively on Cornichon on Groupon’s mismatch with restaurant industry margins. While certain sectors (salons, spas, yoga studios) appear to have the margins to fund the use of Groupon as advertising to opt-in shoppers, it’s not at all clear that coupon shoppers are as interested in daily spa treatment offers as they are in daily deals on hot dining spots.
This raises a few, but substantial questions about a) the actual size of Groupon’s pool of potential consumers, b) the actual size of Groupon’s pool of potential business buyers, and c) the social coupon space’s susceptibility to a tragedy of the commons. (As to that last, if the social coupon “works,” and customers are acquired, there will be less reason for businesses to use social coupons as they’re currently structured. On the customer side, it’s already become a tragedy of the email inbox, which fills with spa and salon and yoga deals.)
Tippr's deals of the day
While Groupon is clearly worth something, it’s not at all guaranteed, as they say, that past performance ensures future success. For my speculative money–which is exactly $0, full disclosure–the hyper-competitive social coupon market has already robbed Groupon of its power to dictate the most favorable terms possible. And given the depreciating value of email databases, its head start in customer acquisition comes with an expiration date.
No, what is most fascinating to me–and seems underreported–is not Groupon’s value per se, but the revenue that it has generated from the small business sector. While many armchair analysts are eager to tell you how running a Groupon sale should be considered an advertising cost, not a simple discount, what’s incredible is that Groupon has found a way to separate small business owners from their money at all.
The most valuable lesson that social coupons can teach us has to do with the use of behavioral psychology for selling to small businesses. That has long been the holy grail of anyone in B2B: the sheer size of the market is tremendous. But until Groupon, that market had also been known by the sheer reluctance of small business owners to part with their cash for any reason, let alone marketing and PR.
Before Groupon, to generate real traffic, a retailer might have had to cut prices 50 percent and pay for an advertisement. This the small business owner hated to do. Bootstrapping makes for incredible stinginess with actual cash when the outlay is in advance of a promised sale. The sense of risk can be heightened in proportion to a lack of trust in the potentially snake-oil-selling marketer, but in general a social coupon’s magic is in its micro-payment approach to the advertising/customer-acquisition budget. (Or so it appears.)
Notice that with Groupon, the cost (and its pain) is bundled and contained within a multitude of sales transactions–risk, meet much more immediate reward. Social coupons have already extracted an incredible amount of cash from small businesses, but only on condition of a sale (a lure so potent that some business owners have been driven to near bankruptcy by it). Behavioral psychology will tell you that people value not losing money more than gaining it, and Groupon’s success-so-far bears this out.
What is the most salient feature of the social coupon, after all? It’s not the coupon idea. It’s not online delivery. It’s not steep discounts. All of these were available before. (Even the massive audience Groupon provides was around in one form or another.) It’s the transposition of the sequence of events (the small business owner and Groupon make a sale…and then Groupon takes the lion’s share). You could call it misdirection: Watch this sale! says Groupon, and the smiling business owner fails to feel the difference, that it’s not really their sale anymore.
Notice that the small business owner still has to take the marketing theory on faith: These customers will return, spending like sailors! (Not that this doesn’t happen–but Groupon’s ability to guarantee conversion rates is not, I suspect, much better than anyone else’s.) So the main thing that has changed, really, is simply that Groupon has deferred charging for this trial-offer form of advertising until that first sale is made. It’s still the small business owner’s money, but it’s associated in time with the benefit of making a sale.
(Timing is key on the B2B side as well as the consumer side: nothing motivates a business owner like an immediate uptick when business is slow, and the purchase cut-off creates a sense of scarcity for the customer when, in point of fact, there’s an over-supply.)
A canny business owner will still sit down and pencil out break even points, but psychological appeal (and/or recessionary desperation) is evident in the amount of small businesses who clearly haven’t. And this is what is different: small business owners flocking to try social coupons as a form of advertising, when an up-front payment would dampen their ardor significantly. Groupon, of course, doesn’t assume extra risk for nothing–that’s why they have been able to get the lion’s share that a more competitive field is clawing back.
Again, it’s the timing and automation of the micro-payment process that matters here, because without that, Groupon would be spending even more than it does on sales staff. Chalk up one more thing that newspapers–the industry that can’t out-design Craigslist–should have done, but didn’t. As critical as people can be of Groupon’s model, it remains true that they don’t get paid unless a sale occurs, and then only in proportion to the sale price; newspapers, who already had coveted local audiences, were not willing to take even that chance.
Still, the great Groupon experiment stands right up there with the App Store as a paradigm shift in investment and payment, one that takes into account the hard-wired in human nature. Groupon led the small business horse to water and made him drink. Who’s next? What other sectors are limited by psychological barriers, rather than purely financial ones?
