The daily deal space has seen mixed success lately.
BIA Kelsey recently adjusted its outlook for the space, stating that revenues from daily deals for 2011 will actually be close to $2 billion worldwide, not $1.2 billion as originally estimated in March of this year. According to daily deal site aggregator Yipit.com, however, nearly one-third of daily deal sites in the U.S. (170 out of 530 sites have been sold or shut down in 2011).
So what's the real deal?
The easy answer is that the large players -- specifically Groupon and Living Social -- are responsible for much of this growth that we're seeing. These companies have acquired similar companies in other countries and regions (e.g. Germany, Thailand, Middle East). But the average cost to acquire customers remains high -- according to Group Commerce, it costs between $5 and $12 to acquire a new customer in the industry and Daily Deal Media projects it to be as high as $32. Jonty Kelt, Group Commerce CEO has said, "That is the root of why daily deal sites are floundering -- the high cost of customer acquisition."
However, Groupon CEO and co-founder Andrew Mason sent out a company-wide email explaining to his staff how the initial high cost of customer acquisition pays off in the long-run:
"Our marketing...is designed to add people to our own long-term marketing channel -- our daily email list. Once we have a customer's email, we can continually market to them at no additional cost. Compare this to Johnson & Johnson, McDonald's, or most other companies. If I'm Johnson & Johnson, and I'm trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you've bought your first box."
Mason's strategy and confidence in his company is well-founded; there are ways to make daily deals take firm hold in our daily lives. But it ignores the reality of churn -- how to retain and grow frequency among your best customers.
This "churn concern" is one that can be addressed by a recipe for success in the deal space, that has only three ingredients: location, mobile, and consumer control.
This recipe uses the most personal of all devices (the mobile phone) and leverages one of the most important factors that every business-owner is keenly aware of: location, location, location. By understanding the importance of consumer control -- which means that consumers must opt-in to a program, and can then choose what types of messages they get -- the major players in the daily deal scene will be able to create the most relevant programs for their consumers. Once this recipe is in place, the only question remaining is...
Who will win?
The answer to this is a bit tougher -- the race is way more complex and competitive than most think. It's not a two-horse race in mobile, with just Groupon and Living Social in the running. Google has also jumped in the fray and they're catching up fast -- or will soon, if history repeats itself.
Google already has several product divisions that are focused on mobile and location. Pick any of its product groups -- AdMob, Google+ or Google Wallet -- and prepare for a daily deal war that may make Groupon wish it took Google's acquisition offer.
And not to be left out, the large credit card companies are also bound to be major players. They have aggregated both merchant relationships and cardholders, and are sitting on a trove of data about past purchases that can be used to increase the relevancy of any offer. And, they can enable the transaction -- either through a wallet or through simply linking the card to a deal service. Done well, these companies can increase usage and loyalty among both cardmembers and merchants.
Groupon, LivingSocial, Google and leading credit card companies have active and large user bases from which they can draw. Everyone is looking for a deal in today's economy. The winners will emerge as they deliver the relevancy engine that incorporates location, consumer preferences and prior behavior in real-time on mobile. This will take daily deals to the promised land of sustainable revenues, happy consumers and satisfied vendors.
Who do you think will win the mobile chapter of daily deals?
Follow Alistair Goodman on Twitter: www.twitter.com/Placecast