Groupon, a “daily deals” e-mail marketer on the verge of going public, has raised more than $1 billion in venture funding and owns about half the North American market for such services, not to mention a growing global presence. LivingSocial, the No. 2 player, owns another 25 percent of the domestic market.
Their dominance hasn’t stopped an astonishing number of other companies from trying their hand at the same game – more than 600, by one count – despite mounting questions about whether the flood of discounts is good for anyone other than shoppers.
In case you’re not one of Groupon’s 40 million subscribers in North America, here’s how it works: You sign up by giving Groupon your e-mail address, your city of residence and a few other personal details, such as your age and gender. At least once a day, you get an e-mail with an offer – pay $10 for $20 worth of happy-hour drinks at the new pub in your neighborhood, or $50 for a coupon worth $100 on auto detailing services.
Groupon and the businesses advertising their wares each get a cut of the sale; ideally, the offers draw in new customers who will become loyal repeat shoppers, or at least spend more than the face value of their Groupon.
The barriers to entry for wanna-be-Groupons are very low. There are numerous companies selling the technology and support required to get a site up and running, and entrepreneurs on even the tiniest budgets can put something together with an inexpensive blog template. Find a few local businesses willing to offer a deal, write some snappy copy and you’re officially a group-buying site.
Yipit, which aggregates offers from many sources and analyzes the daily deals market, says more than 300 Groupon-esque companies have come online just this year, with names like Heartsy, Waggy Swag and MarketSharing, while 130 have closed their virtual doors.
The explosion of deals is good for shoppers with a high tolerance for a full inbox. In New York last week, for example, an ambitious bargain hunter could have chosen from among more than 180 offers, according to Yipit.
But it’s unclear whether the advertisers will continue to feed the increasingly wide stream of daily deals. Yipit’s data product manager, David Sinsky, says 70 percent of businesses follow up a first group-buying offer with at least one more, indicating satisfaction with the model.
But Sucharita Mulpuru, a Forrester Research analyst, says few merchants are getting coveted new customers via Groupon-style deals. The glut of offers instead has become a discount-finding service for people who otherwise would have paid full price for something they planned to buy anyway.
Mulpuru says Groupon’s advantage boils down to how much it can afford to spend on marketing and public relations — $263 million last year alone, according to a Securities and Exchange Commission. Half the company's more than 9,000 employees make up the sales force that sources its deals.
Of course Groupon also lost more than $450 million in 2010. Only about 40 percent of Groupon e-mails are opened by the recipient, down from 66 percent last year, said Peter Krasilovsky, an analyst at local media and advertising research group BIA/Kelsey.
Add to that the arrival of MasterCard, AT&T and other companies with massive customer bases already established, and the outlook seems grim for the hundreds of small Groupon clones. Some, Krasilovsky says, might survive as the No. 3 or No. 4 player in a given location or by capturing a certain niche; some are making money by providing daily-deal technology to local newspapers and television stations so they can offer deals under their own brands.
But the industry is only a few years old, and there’s room for an upstart to out-Groupon Groupon. One area that hasn’t been fully nailed down is the model for delivering advertising and coupons on smart phones and other mobile devices. LivingSocial and Groupon are working on mobile deals services that show people nearby offers that can be used immediately.
Another piece of the puzzle still up for grabs is the transaction itself, as companies look for alternatives to paying credit card companies to process payments, says Krasilovsky, who expects this to be the next major theme in the daily deals story.
“Mobile phones have the capability of being the next transaction agent. Plastic has moved over to mobile, or will in a matter of time,” he said. But, he added, “We don’t know that Groupon will be the company to execute.”