Has Groupon Lost its Luster?

Is the daily deal site on its last leg?

With the launch of Groupon in 2008 and its rapid rise to a projected $30B valuation, it seemed like daily deal sites were destined to be the next big thing that would change the way we did business forever.  Despite the industry’s ability to attract millions in venture capital and the creation of more than 500 daily deal sites across the country, it now looks like the daily deal was more of a fad than a game changer.

The Wall Street Journal reports that almost a third of the daily deal sites have now been sold or shuttered.  Many companies with the customer base and the clout to go up against the big players have decided to pass on any expansion into the daily deal market.  Groupon’s plan to go public last year included an estimated valuation that was 10 times what current estimates are and there are some who are questioning if the concept of daily deal sites is even sustainable.

Similar to the stories of hot companies like Google and Facebook, Groupon, came up with something new and different that caught on fast. For a while it looked like Groupon was slated to take its position on the leaderboard.   But so far it that hasn’t happened.  What went wrong and why should we care?

It comes down to three main things, increased competition, an unsustainable business model, and the end of the honeymoon between deal sites and seasoned customers.

The Market is Saturated with Daily Deal Sites.

Even with the sale and shuttering of a third of the daily deal sites, there are still more than 300 operating that essentially do the same thing.  Startup costs are relatively low and there aren’t significant barriers to entry which means virtually anyone could start up a daily deal site and take a bite, even if it is only a small one, from the ever-shrinking pie of market share.

The Business Model isn’t Built to Last.

With skyrocketing customer acquisition costs and the realization that there is no brand loyalty built between customers and their deal sites (It is all about the deal, not who is offering it), the current business model can’t be sustained.  Groupon’sSECfiling indicated that it is currently spending about 90% of its revenue on marketing.  While that is to be expected in the beginning, the constant churn of new competitors paired with the loss of customer interest and huge customer acquisition costs don’t indicate that this figure will decrease over time.

The Honeymoon is Over.

At first, the idea of the daily deal was more than enough to generate interest and push companies like Groupon into the stratosphere.  However, not everyone came out a winner.  Some businesses who ran daily deals reported major losses.  Consumers who purchased daily deals experienced major dissatisfaction as businesses were not always able, or willing, to deliver as promised.   Businesses were advised to upsell to minimize losses while consumers became jaded, realizing that if something is too good to be true it must have a catch and lost interest.

What comes next in the daily deal site niche remains to be seen, but here’s what we can learn from it.  When it comes to the latest marketing “thing,” don’t believe all of the hype.   Because when it comes to marketing a small business, it’s not the “one thing,” it’s everything.