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Daily deals: They're taking over your town

After group-buying company Groupon achieved early success, daily deals are all over the place in U.S. cities. Just how many of them is there room for?

There's a scene in the 1989 comedy "Troop Beverly Hills" in which rival bands of Wilderness Girls attempt to best one another in a fundraiser by selling boxes of the same cookies to the households of a single upper-crust neighborhood--and unfortunately for the underdog protagonists, their arch-enemies have beaten them to the punch at just about every house. That's what it may soon look like for the explosion of companies offering ultra-discounted, fire-sale daily deals for local businesses, which have fast become the Web's latest retail craze.

Here's how it works. You'll sign up for an online newsletter that will advertise a different deal every day: a coupon for $10 for a bikram yoga lesson that usually goes for $25, $15 for a $30 tour of historic New York pizzerias (slices not included), or $25 for $50 worth of organic grocery delivery. The catch is that either there's a very limited number of "deals" available, or more likely, the service follows a "group buying" model in which a certain number of people need to opt in before any of them get it.

Taking a cue from geek favorite Woot, which offered a single item for sale each day in a limited quantity, the model was exposed to new demographics when luxury sample sale outlets like Gilt and Ideeli debuted, and has now moved on to a market that the digital advertising industry has long hoped to capture: independent local businesses. Even though there's a clear market leader in Groupon--which has raised a notable amount of funding, declared that it's profitable, and swelled to over 30 local editions--rival city-specific daily deals newsletters are absolutely everywhere.

"I counted it yesterday. There are, like, 46 different sites," said David Ambrose, co-founder of Scoop St., a New York-based site that hopes to offer an alternative to the Groupon juggernaut. It's gotten to the point where another New York-based company called Yipit has even launched an aggregator that points subscribers to deals for businesses that those users frequent.

For the companies brokering the deals, it's a retail model with relatively low overhead costs. For the businesses involved, it's an advertising opportunity that many see as akin to taking out space in a local paper: If the deal "tips," the business pays a cut of proceeds to the daily-deal outlet. If it doesn't tip, they don't pay a thing. Consumers get to opt into a steep discount, and are compelled to tell friends about it to ensure that the deal goes through. There's no surprise that these services have popped up like mushrooms.

"Obviously, you can see how many fast followers and things are going on in this space," said Tim O'Shaughnessy, CEO of LivingSocial, a Washington, D.C.-based Facebook application development company that chose to expand into local deals and now operates in nine U.S. cities. "There's interest, and there are dollars from a local merchant standpoint."

New York-based frozen yogurt outlet 16 Handles has used two daily-deal services, LivingSocial and Groupon, to drive business.

Local businesses, at least those that are trying to target urban twentysomethings and thirtysomethings whose media consumption is dominated by the Web, are jumping at the chance. "They're doing it to promote their business, and they're instantly over the course of one day getting so much exposure and getting so many people who are likely to come through their doors," said Solomon Choi, the 29-year-old owner of New York frozen yogurt shop 16 Handles, who has used both Groupon and LivingSocial for daily deals and said he would "absolutely" do it again.

Choi said that before the advent of local deals, he'd have bought newspaper space to promote 16 Handles. "I took ads in the Village Voice, and a couple other local publications," he said. "Really, what I found is that it's a lot more cost-effective when you do something online. You can forward e-mails. You can share them with your friends, whereas with a paper, you're done."

Group-buying deals are by no means a new phenomenon. They surfaced during the original dot-com heyday with services like MobShop and Mercata, and for the most part, they flopped. Executives in the space right now, though, say that advancements in social media have made it a much more stable business model. Facebook and Twitter sharing buttons are ubiquitous on daily-deals sites, as companies encourage consumers to tell all their friends and ensure that the deal goes through. In fact, Tim O'Shaughnessy said, the winners in this business will be the ones who best harness the power of social-media channels.

"A bunch of our users are Facebook-connected when they go and make purchases," O'Shaughnessy said of LivingSocial. "We're really, really good at that social engineering and social graph data, so their brand gets spread a lot more than it may in other scenarios."

Others say that the face-to-face interactions with local businesses are more likely to be the dealbreaker, so to speak.

"The biggest thing about this business, part what we're trying to focus on, is relationships," Scoop St.'s Dave Ambrose said. "If you can offer a service for businesses that really caters and appreciates what they're doing in such a way that they become an ambassador to other people in the area, that's really, really powerful."

"Really, what I found is that it's a lot more cost-effective when you do something online. You can forward e-mails. You can share them with your friends, whereas with a paper, you're done."
-- Solomon Choi, owner,
16 Handles yogurt shop

Groupon CEO Andrew Mason says he doesn't lose any sleep over the recent flooding of the market. It's seasoned: Groupon raised its Series A round of funding a full two years ago, and prior to that had grown out of an existing company called ThePoint.

"We don't spend a lot of time thinking about people whose competency is copying something that somebody else does," Mason said. "When we think about competitors, we think about newspapers, we think about radio, we think about television, the other places where people are spending money."

But it does concern them for a different reason, Mason explained: With so many local-deals services out there, he says there are a few bad eggs in the mix. He didn't name names, but he said they're a problem.

"A lot of what concerns us with the nature of all these sites is that they're people who are just quickly throwing something together because they see a quick way of making money and there's no real passion for what they're doing or the cause behind it," Mason said. "As a result there's a poor quality of customer experience, poor quality of merchant service, and sometimes these competitors will talk to a merchant before we do, or a customer before we do, and it'll ruin the experience for us. We've invested a huge amount of energy in being awesome at everything we do and when somebody's first exposure is with somebody who knocked us off, then that's bad. That happens a lot."

Scoop St.'s Ambrose, on the other hand, argues that the smaller players can actually offer a better experience here. Focusing on a smaller number of cities may give them insider knowledge of what will be a surefire hit with the locals--like a half-off deal for the 7th Street Food Festival, a showcase of local eateries on a single street in Manhattan's East Village. Downtown foodies jumped at the chance.

Still, frozen-yogurt shop owner Choi said that it really does come down to which service can offer the most reach. The response difference between LivingSocial and Groupon "was like night and day," he said. With LivingSocial, "a couple hundred coupons were sold. With Groupon it was a couple thousand."

Right now, consumers win: they can choose from a seemingly endless parade of offers from cupcake bakeries, Pilates studios, and ballroom-dancing schools. But what the glut of deals services means on the business side, particularly since Groupon is clearly in the lead, is that there are invariably going to be some roll-ups, acquisitions, and failures--some of the smaller companies may already be shopping themselves to local media companies looking to offer an alternative form of advertising. Everything could be further shaken up if somebody even bigger gets into the mix.

There's no question, for example, that local-deals services have been influenced by the success and modus operandi of Yelp, the business reviews site that has managed to get a hold on U.S. local markets--both eager consumers and businesses--the way few other Web companies have been able to. Groupon, in particular, aims to foster a Yelp-like community of loyalists embodied by its current quest to find the nuttiest Groupon user in the country through a contest called "Live Off Groupon," in which the contest winner will earn a hefty cash prize by successfully subsisting exclusively on Groupon deals for 365 days straight.

Will Yelp jump into the local-deals market like this and blow all the current group-buying companies right out of the water? Probably not, the company's founder said, but he hinted that it wouldn't be very hard to.

"It's not something we're super focused on right now," Yelp CEO Jeremy Stoppelman told CNET over coffee earlier this month. "The sheer fact that there's 500 of them out there indicates that there's a very low barrier to entry."

A correction was made to this story: Yipit is based in New York, not Atlanta; the spelling of LivingSocial CEO Tim O'Shaughnessy's name was also corrected.