Fast Company - April 2012

of 2011, even as Google and PayPal
ramped up their own coupon offerings,
the world bid farewell to 798 deal sites
( 7.61% of the industry) due to consoli-
dation and closure. “When any new
channel opens, there’s a gold-rush men-
tality,” says Jay Weintraub, who runs
Daily Deals Summit, an industry con-
ference. “We’re in a healthy period of
reassessment now.”
Though the daily-deals industry
generated almost $3 billion in 2011, the
attrition of both providers and mer-
tions about its sustainability—as well
as who’s at fault for deals gone wrong.

DEAL MAKERS

After Groupon and LivingSocial, the coupon cast is filled out with bit players.

Groupon

54%

CELADON & CELERY
SHELSKY’S SMOKED FISH
YOGA SUTRA

Offer: FLOwer-Arr AnGinG cLASSeS
Success level: HiGH
Offer: DiScOunteD FOOD
Success level: SO-SO
Offer: c HeAP cLASSeS, Free GeAr
Success level: Sub-LOw

“You want to have something bigger to offer customers than what brought them in,” says Ivie Joy, cofounder of Celadon & Celery, an event-planning and flower-arranging business in Los Angeles and New York. “That’s the only way they come back.” C&C’s deal is on flower-arranging workshops: Normally $300, a coupon brings the cost down to $99. Then, once buyers—mostly women— arrive, Joy can sell them on other services. “When women come in for a class, we show them how we could help with their wedding,” says Joy. “Often they wind up booking us to do the flowers.” The average spend for the weddings C&C does is $10,000. By offering a deal on a unique experience in a nonsaturated, $35.2 billion market (flowers), the company is able to build a customer base with little concern about competitors playing vulture with a similar deal.

Being a successful partner also allows merchants to negotiate better terms. In the standard model, a merchant agrees to sell, say, $100 of goods or experiences for $50, and then splits that $50 evenly with the deal site. After the brisk sales of C&C’s first offer, Joy was able to haggle LivingSocial down to an 80/20 split— offsetting more of the $200 markdown.

“They’re all shitty deals for us,” says
Peter Shelsky, of Shelsky’s Smoked Fish
in Brooklyn, New York. “LivingSocial’s
clientele is a little higher-end. Groupon
has the bargain hunters. They only
want to spend the coupon value, and
they’re often rude—which is amazing
because you’re basically giving them
stuff for free.”
Shelsky’s first deal was a $15 coupon
for $30 worth of food. He says he came
out ahead, but only because 30% of the
coupons were never redeemed. This is
the “breakage rate,” another factor for
merchants to consider. LivingSocial
pays based on deals sold rather than
those redeemed, so Shelsky got paid
for the coupons he didn’t service. Con-
versely, rival site Gilt City keeps the
amount of unredeemed coupons.

In January, as the Super Bowl neared
and winter dragged on, Shelsky did
a deal with Groupon: He offered a $20
coupon for $10, a $45 for $20, and
$160 for $55. Groupon sold 1,064 cou-
pons, and Shelsky’s took in more than
$11,000. “It helps pay the bills,” he says,
“particularly in winter, when cash flow
is slow. But busy season? Or holidays?
Forget about it.”
In 2009, Lisa Bridge bought successful
Manhattan yoga studio Yoga Sutra
from its founder and relocated it to a
less-expensive space. The move took
longer than expected, and when it re-
opened, construction was still going on.
Students fled. To stanch the bleeding,
Bridge began offering deals from sev-
eral sites at once. The discounts were
intended for first-timers, but so many
were offered, and through so many sites,
that buyers could effectively become
regulars at a discount. To keep pace with
offers from other studios, Yoga Sutra
even began pricing deals at more than
50% off. Meanwhile, existing students
were crowded out, and no new instruc-
tors had been hired to accommodate
the rush. At the front desk, confusion
reigned: Did the LivingSocial deal offer
a free mat? Or was it Groupon? Wait—
has this person been here before?