Let’s make a deal, said Google. Not even for $6 billion, said Groupon.
And with that, the company founded just two years ago in Chicago convinced a few more skeptics it has cracked what Internet companies have long considered their Holy Grail: local advertising revenue.
The big-dollar offer for Groupon—the undisputed king of a U.S. daily deal industry already worth $2.5 billion a year—also emboldened an armada of coupon competitors looking to grab a piece of the fast-growing market.
Several competitors including Washington, D.C.-based LivingSocial, The Big Deal from Angie’s List and local startup Bogotown.com are seeking to duplicate Groupon’s group-buying magic by selling services at a deep discount in exchange for a share of revenue.
Others are taking a different approach to coupons: Texas-based Woot.com sells discounted products for a limited time in so-called flash sales; and websites including Coupons4Indy.com and locally based ChaCha Search are putting traditional coupons online.
Groupon’s simple but clever model that gives companies exposure to potential customers at no upfront cost turned profitable in just six months. Its website serves 300 markets in 31 countries and drew 6.4 million unique visits in the United States in October, up 657 percent from the same month last year, comScore reports. It is raking in an estimated $2 billion in annual revenue.
LivingSocial, the nearest competitor, grew traffic even faster in October, rising 812 percent to more than 4 million visitors. The company is on track to achieve $500 million in annual revenue and this year attracted a $175 million investment from Amazon.com.
Google’s attempted buyout is seen as a milestone for the social coupon industry. The $6 billion offer was three times what Google paid for YouTube. It matches the combined stock market value of Gannett Co. and The New York Times Co., owners of more than 20 TV stations and 90 daily newspapers including USA Today and The Indianapolis Star.
It’s the strongest acknowledgement yet that a crowded field of Groupon competitors faces a tough path to success, said Shawn Schwegman, ChaCha’s chief marketing officer.
“It would take a monumental effort, a lot of cash and a lot of marketing to knock them off the top right now,” said Schwegman, who previously held a similar position at online retailer Overstock.com. “They’re kind of the Google of social coupons. It would take almost an act of God at this point for a new entrant to knock them out.”
Riches in niches
Plenty of startups—including an offering from Angie’s List—are betting the future for group buying and online daily deals is specialization.
A new site called jdeal.com is targeting a Jewish audience. Two online entrepreneurs in New York launched the site last month in 12 cities including Chicago.
The site follows the Groupon and LivingSocial model, focusing on service providers like restaurants and spas. Other sites focus on group buying of products.
Dog owners can find daily bargains at BarkingDeals.com, a site based in Oldsmar, Fla., that launched Dec. 6, and has peddled treats, grooming products, and a classical-music CD designed to calm the most stressed of pooches.
Bulx.com, based in Columbus, Ohio, offers flash sales of high-end furniture, sinks, faucets and vanities. New York-based Gilt.com provides a similar service for the high-end fashion market. The daily deal site Woot.com, which Seattle-based Amazon acquired this year for an undisclosed price, focuses mostly on electronics.
The new daily deal offering from locally based Angie’s List, dubbed The Big Deal, targets the company’s core service categories including painting, plumbing and home improvement—segments Groupon has mostly avoided.
Angie’s List offers the best deals to members, but nonmembers can pay a little more to snag a great deal on dryer-vent cleaning or sprinkler winterization. Only service providers with an “A” or “B” rating on the List can participate.
The company began launching deal sites in its more than 200 markets in April, using part of a $25 million round of private funding. The offerings are promoted in e-mails to members and also show up in searches for service providers, said Angie Hicks, the company’s chief marketing officer.
“Our goal is to offer members information on the best service providers and get them the best prices,” Hicks said. “This was just a natural extension for us.”
Hicks said the company does not have to take a 50-percent cut—what Groupon typically collects—from coupon offerings since it also brings in revenue from subscriptions and traditional advertising.
The Big Deal is running three offers a week, with the deals typically lasting a few days since customers tend to avoid spur-of-the-moment decisions on bigger-ticket items. Local businesses offering deals include Andy’s Mobile Oil Change, Spic & Span Cleaning and Service Plus HVAC.
Hicks is convinced Angie’s List is well-positioned to compete in the coupon field, and to turn customers into List members.
“I think there’s room for multiple players, but it comes down to how they’re differentiating,” she said. “We have deep reach into that home improvement segment.”
The recession taught consumers how to shop smarter using coupons, and they aren’t ready to pay full price again even as the economy turns, said Jackie Warrick, chief savings officer for CouponCabin.com, a privately held Chicago-based online coupon powerhouse with more than 40 employees.
CouponCabin is a senior citizen in the business, having launched in 2003. The site does not charge for its more than 100,000 coupon offers from almost 3,000 mostly national retailers, including Indianapolis-based The Finish Line, Home Depot, Sears and Target. The site’s business model is based on commissions from retailers.
The average CouponCabin user spends just 80 seconds on the site and saves $19, Warrick said. Members of a coupon club get e-mails about deal changes and alerts on selected retailers.
The site registered 20 million unique visits in November and December, and a 60-percent rise in traffic on Cyber Monday.
“You know what you need, you know what you want, and you get to save money on it,” Warrick said. “I never buy anything now without using a coupon.”
ChaCha takes a similar approach in its response to questions from customers on the prowl for coupons—collecting deals from all over the web, Schwegman said.
Thousands of the 3 million questions ChaCha fields daily are related to online shopping and special deals at brick-and-mortar stores.
ChaCha’s more than 60,000 guides often answer queries with links to coupons. Meantime, ChaCha advertisers such as Gap and Express take advantage by sending exclusive offers to those searching for information on jeans or sweaters.
The company also offers traditional coupons—which companies pay to post—at ChaChaCoupons.com, including offers at King David Dogs and Ritter’s.
Gannett, parent company of The Indianapolis Star, now posts a variety of coupons and special offers on its Metromix.com and ShopLocal.com sites.
The biggest local player in posting traditional coupons online is Coupons4Indy.com, which Michael Ward founded in 2003. It includes thousands of coupons from hundreds of local restaurants and merchants.
A site called DealRadar.com, developed by Local Offer Network of Chicago, aggregates daily deals for dozens of cities including Indianapolis into e-mail roundups.
The group says daily deals are a $2.5 billion market in the United States with plenty of room to grow.
“The industry will continue to evolve, but it has not even come close to its peak,” spokeswoman Lauren E. Russ wrote in an e-mail. “These deals are well-known in markets that were early to adopt the concept, but millions of consumers still haven’t heard of them.”
One of the deal sites the company aggregates is Bogotown.com.
Indianapolis advertising veteran Ann McWilliams and her partners launched the site in March—before Groupon arrived in town—to sell buy-one-get-one-free coupons. Already, the company is profitable and plans to add to its staff of four.
“It’s a rodeo out there, I’ll tell you that,” McWilliams said. “It’s just really blown up overnight sort of like Hush Puppies shoes.”
What differentiates Bogotown.com is that it’s truly local, said McWilliams. Recent offerings include $25 for $50 of gift cards at Barcelona Tapas and $20 for a massage or facial at Eden’s Pathway.
The company sends its deals by e-mail to 25,000 people, including 7,000 on its own list and the rest from affiliates and partners. An average of one out of every 100 messages leads to a sale.
Local radio stations long have offered deals similar to those peddled by Groupon, accepting products such as gift cards in lieu of cash for advertising and then selling the cards to listeners.
WZPL-FM runs a half-price-deals site called Indianapolis Perks (start at wzpl.com) with several deals available at once, including $15 for $30 of food and drink at Chatham Tap.
The rapid growth of Groupon means competitors have to find ways to sweeten the pot for customers and advertisers. Customers can get a free LivingSocial coupon if they refer three friends who also buy the offer. The company also is moving into the travel business, offering daily deals on weekend and longer getaways.
Ultimately, the key to growth for companies like Groupon is keeping a strong pipeline of businesses eager to offer deals.
Kelties in Westfield hopes to offer another one soon, after a November Groupon attracted new customers who tipped well, said Manager Kim Henkaline.
The restaurant sold 1,776 coupons for $15 apiece, entitling diners to $35 off. Kelties kept half, minus a 2.5 percent fee it split with Groupon for credit-card processing.
Bottom line: The restaurant collected more than $13,000 from its own advertising campaign.
The barriers to entry in the group-coupon business are higher than they may appear. Just ask Timothy Moorehead.
He works out of Indianapolis as a vice president for Naples, Fla.-based myEZdeal.com, which offers daily coupons in Portland and Nashville.
The site launched in June 2010 in 11 cities but quickly had to scale back. The private owners had spread themselves too thin on marketing dollars, which are key to achieving a “viral effect,” he said.
“It’s not as easy as it looks—to get the word of mouth, develop the e-mail list, build a customer base, and get deals out,” Moorhead said. “But it’s a good thing that it’s hard. There’s a lot of space to grow.”
Now myEZdeal.com is growing more slowly and focusing on offering coupons in underserved suburban markets.
The company spends about $300,000 to enter a market, and registers about $3,000 per day in sales in each of its two developed markets, Moorhead said. A launch in Indianapolis is tentatively slated for mid-2011.
At least one firm is trying to lower the barriers to entry for existing media companies.
Seattle-based Tippr, the third-largest group buying site after Groupon and LivingSocial, has signed up TV-station owner Belo Corp. and other old-media firms to launch their own group buying sites on Tippr’s platform.
CEO Martin Tobias said there’s a good reason Google offered so much for Groupon.
“Daily deals are the future of local advertising,” said Tobias, who leads a staff of 50. “In two years, group buying sites have created a bigger revenue source from local than Google has in 10 years of doing Adsense [Google’s text-based advertising program].”
Newspapers and TV stations are in the perfect position to capture some of that revenue, if they would just wake up and realize they have the audience and sales staff the deals sites covet. He contends media companies should stop selling ads to Groupon and start competing for the estimated $500 million a year the company is earning.
“Local advertisers don’t care about brand advertising, and they don’t want to spend money,” Tobias said. “They want people to walk in the door, and with these, they only pay when people walk in the door. This is the ultimate local marketing tool.”•