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Groupon model still faces obstacles to success

A new study from Forrester Research says the daily deals model is riddled with risks.

Groupon goes public, Friday November 4, 2011

Now that we have gotten the Groupon IPO out of the way, the debate over the health of the daily-deals sector rages on.

In fact, the novelty of being one of the fastest growing Web juggernauts ever began fading before last week's IPO. One early warning sign: the Chicago-based company's core business, which it pioneered just three years ago--prepaid local daily deals--dipped 3 percent during the third quarter, Yipit, a deals aggregator and industry tracking firm, reported prior to Groupon's IPO.

What's more, according to Yipit's research, Groupon's gross billings per subscriber are down (14 percent for Groupon's overall business) and (22 percent for local deals). So, while Groupon maintains the world's largest e-mail database for daily deals with 115 million subscribers, it's concerning that billings per subscriber are declining.

Adding to the riskiness of Groupon's unseasoned model, Forrester Research issued a new report today titled "Myths and Truths About Daily Deals," detailing inherent risks in the business of daily deals. The study's author, e-commerce analyst Sucharita Mulpuru, also published this blog post today.

Among Forrester's key findings:

E-mail won't drive future growth. Up to now, e-mail has been the primary vehicle for delivering daily deal offers via consumers' inboxes, but that's changing. Twenty-nine percent of respondents say they unsubscribe from these offers and 49 percent never sign up in the first place because they don't want to further clog their e-mail inboxes.

Daily deals don't drive loads of incremental sales. More than 50 percent of consumers redeeming prepaid Web coupons already support the brand being discounted, and more than half of consumers surveyed indicated they would have bought the same deal with or without a coupon. There's also the industry's "breakage" problem, according to the study's author Mulpuru: 43 percent of consumers who have purchased an Internet coupon have neglected to redeem their offer before it expires.

Still, industry watchers aren't writing off Groupon's unproven business model entirely. "It's still a sound business," Peter Krasilovsky, an industry analyst at BIA Kelsey told CNET. Analysts also point to the fact that deep-pocketed Google, Amazon, and AT&T have all entered the deals space and are investing aggressively. So that's important validation for the nascent sector. In addition, Forrester says "Groupon will stick around and eventually get to profitability." But, Mulpuru, the analyst author warns, "It'll get there with far less interesting deals for shoppers and probably as a smaller company."

Forrester's report was conducted in two phases. The first phase took place from June 11, 2011, to June 21, 2011, and involved the topic of voucher sites and 9,449 U.S. participants. The second phase of research was conducted from June 23, 2011, to July 11, 2011, with a total of 14,380 U.S. respondents discussing flash sales.