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Let's make a deals site, or two

The rise of sites like Groupon and LivingSocial has been so steep that a whole new breed of companies has arisen specifically to keep stoking the daily-deals fire. Can it possibly last?

Every so often a marketing fad comes along in digital media that makes companies willing to adopt it so quickly that they wind up bending and twisting their business models like Silly Putty. There were Facebook apps. There were Foursquare-style "game mechanics." These days, short-term retail deals have taken over.

Of course, none of this is new. Following the runaway success of Groupon, which offers a steep daily discount-a-day in dozens of cities around the world, with the condition that a minimum number of buyers must sign on; and Gilt, which has built an empire of low-priced designer sample sales with ultra-limited inventory, millions of bargain-hungry consumers have started filling up their inboxes with e-mail alerts on local spa deals, short-term restaurant promotions, luxury travel discounts, and limited-inventory designer handbags.

The Web's biggest want in. Microsoft's MSN has a new partnership in place with ShopLocal, owned by media company Gannett. Twitter is trying to get into the space with a deals-advertising account called @earlybird. And earlier this summer, Amazon acquired Woot, the geeky fire-sale retailer that arguably kicked off the whole fad in the first place.

The latest development is the proliferation not just of daily deals sites (though they're still emerging by the day) but of services built around them. The daily deals industry is now home to its own crop of aggregators, brokerages, and even secondary marketplaces that are all hoping to capitalize on the craze without actually operating deals themselves.

Is this a healthy cottage industry--an "ecosystem," as Valley marketing jargon would put it--or an unstable cluster of activity around a passing fad?

"It was a little questionable whether we should launch," related Vinicius Vacanti, co-founder of a local deals aggregation start-up called Yipit, explaining that when his company launched in February there were fewer than two dozen daily-deals sites out there. "But we did it because we had this view that it would accelerate, and that maybe by the end of the year there would be 50 (deals sites). Now there's more than 120 daily deals sites. On top of that, you've seen many of the major media companies launch their own daily deal projects."

Yipit isn't the only aggregator out there. Citing "a shift in our business focus," an event-listing start-up called Center'd, which launched two years ago, announced this week that it completely changed direction to focus on a local-search product and a daily-deals aggregator called The Dealmap. Like Yipit, they're banking on a belief that, contrary to what some speculate, Groupon won't totally smoke out its smaller competitors.

"I think you see a lot of the smaller daily deals sites actually often have really good deals on their services and that's especially as the trend continues where a lot of these sites are going to put themselves more into verticals where it's restaurant daily deals or spa daily deals or mom-focused daily deals," Yipit's Vacanti said.

And here's where another niche of start-ups comes in--companies that aim to make it easier for vendors to offer daily deals in the first place. One site called GroupCommerce sells white-label software for building custom daily deals sites, as does Tippr, which offers deals of its own as well. A company called DealOn Media launched a product Monday called OfferEx, built on advertising exchange technology, that lets publishers buy daily deals from vendors through a system much like digital-ad pioneer DoubleClick.

"It's very expensive to acquire these deals," DealOn vice president of business development Rafael Cosentino told CNET. "Second-tier daily deals sites--they don't have a sales force in like 50 markets, they have a sales force in two markets. Here, they can get deals in those other markets without having the capital expense of a sales force." He says they've signed four publishers--think local newspapers, which have been eager to find a new source of ad revenue--and nine deals sites so far.

On the consumer level, a site called Lifesta has built a reselling market for deals coupons, which often don't expire for months after they've been purchased--a testament to just how popular some of these sites have grown and how the psychology of limited-edition impulse shopping can sometimes lead to a bit of buyer's remorse.

But while the bigger daily deals sites have proven to be impressive moneymakers as well as a true mainstream hit, that's not a sign that companies built around daily deals sites will experience anywhere near a similar level of financial success. Yipit, for example, does not have a revenue model in place and has chosen to raise venture funding to fuel growth while profits are still distant.

"The idea was to raise funding so we wouldn't have to focus on the ad side of things," Vacanti said. "We're 100 percent focused on getting consumers to our site and offering the best product possible."

Perhaps the biggest problem for companies aiming to capitalize on the daily deals craze is that many of their business models are predicated on a packed market that is, for one, constantly open to new competitors, and two, is tough for consumers to navigate. In truth, many of the smaller daily deals companies may fail to survive or get acquired by bigger competitors, cleaning things up and solving the aforementioned problem for themselves.

"It's an easy business to get into, but it is a hard business to scale," said Tim Shaughnessy, CEO of LivingSocial, a Facebook app company that switched its focus to daily deals last year and now is one of the biggest sites in the space that isn't Groupon. "If you look at our competitor list, it's like 250 competitors. But if you look at market share, it's like 98 percent of the market share is in a couple of companies."

"Small businesses are being overwhelmed by all of the different services that exist and don't have the time and expertise to evaluate them all and learn to use the best ones," said David Lifson, CEO of Postling, a start-up that has built a suite of tools designed to tackle the glut of online marketing and advertising options for resource-strapped local businesses. "The other problem is that small businesses are besieged by sales calls--first from YellowPages, now from deals sites--and they are developing serious sales fatigue."

Lifson added that from working with local businesses in the development of Postling, he's found that they believe daily deals sites are good for brand awareness, but that because the companies take such high commissions from sales--Groupon takes 50 percent--they don't always translate into extra profits for them.

Still, the daily deal, in various incarnations from Groupon to Gilt to Woot, is here to stay: it's a quick, lightweight, fast-changing kind of e-commerce that's tailor-made for the attention deficits of the real-time Web. The catch is that the market might not be quite as big, open, or free-for-all as things seem right now.

But at the moment there's just no end in sight.

"This thing is on hyperdrive," Yipit's Vacanti said. "It usually takes five years to get all the vendors in line. This thing has taken six months."

This post was corrected to verify the spelling of DealOn vice president Rafael Cosentino's last name.