Here are the problems facing Groupon and Living Social: Scale, repeat customers and targeting

Are Groupon and Living Social the next great things in online advertising? Or, are they just a flash in the pan?

That was the fascinating debate which broke out earlier this week at the Mobile Future Forward conference in Seattle where panelists debated the challenges in front of the fast-growing daily deal businesses.

RealNetworks chairman Rob Glaser — a partner at the venture capital firm Accel which holds a stake in Groupon — got things going when he asked the audience how many people had purchased a Groupon or Living Social deal. Most of the hands in the room went up. Then, he asked how many people had purchased five or more deals through the services.

Only a few people raised their hands.

The point was clear. Groupon and Living Social have done an excellent job of grabbing attention, but the jury is still out on whether they can turn the curious onlookers into repeat buyers.

Glaser, for one, seemed pretty bullish on the idea. And he pointed out that he thought Accel’s investment will turn out to be a good one.

Rob Glaser

In his remarks, Glaser said that the services need to get better at targeting:

“The challenge is these things have grown so fast, unbelievably fast. And there’s a lot of figuring out to do. So, I don’t think they are the Hulu hoop … but there is so much room for optimization and there is so much room for being much more selective about targeting users and what categories they go into. The reason, I think, there is going to be a long-term resonance is that these are sort of post-2008 phenomena — after the great recession hit, a large cohort of this country and Europe and most other parts of the world, a lot of consumers were financially squeezed. So, someone who offered better value was really compelling. And Groupon and Living Social and the like created really good value propositions, and for certain cohorts of products — typically products that have gross margins associated with them — it was a win-win for everybody. Then, everyone else jumped in and you found a lot of people who got bad customers, and didn’t like it. But there is still a large base of benefit there, and … I think they will get better…. My take is that it has grown so fast that there is going to be a winnowing out period, but there is really something there.”

Bryan Mistele of Inrix, who also sat on the panel, agreed with Glaser that the companies just aren’t doing enough to land repeat customers.

But he wasn’t as confident of the companies’ long-term prospects, noting that the vast majority of people who buy a Groupon deal don’t buy a second one.

Bryan Mistele

And he stressed the difficulty in scaling the business — one of the reasons why Groupon has grown from 37 employees in June 2009 to 9,625 as of June 30, 2011.

 ”In order for it to be interesting, it has to know something about me and my preferences and be able to target me. Think about the sales effort that you need to go in and sell at a mass level to the point where I can personalize a local offering for you and your interests. It is a huge scale problem, and the challenge is very few people will ever get that kind of scale. And that’s the problem with where Groupon is today. If anyone could have done this right, it was Amazon. But when they launched their partnership with Living Social, the first email I got was for a spa treatment, and I was like: ‘You’ve got to be kidding me. You know everything I’ve purchased in the last 5 years, and this is what you are sending me.’ So, what did I do? Immediately on day one, I turned it off, and I’ll never get another email.”

Previously on GeekWire: Amazon integrates AmazonLocal deals service into Kindle

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