Daily Deals 101

I attended the inaugural Daily Deal Summit at The Grand Hyatt last week in Manhattan.  I frequently will capture my thoughts and reflections on my way home from tradeshows such as LeadsCon and the TARGUSinfo Summits.  This time, however, I think I may have bitten off more than I can chew.  :-S

Firstly, few readers of this write up are likely to have attended The Daily Deal Summit, so a lot of background information that may normally be skipped over requires attention.  Additionally, this space of Daily Deals is SO new, establishing a baseline of concepts, terms, economics, and conventions is a bit like chasing feathers in the wind.

A fair question to ask would be “why is the CEO of DoublePositive” attending a “Daily Deal Summit” in the first place?  It’s a good question.

Perhaps the best answer is because I am a huge fan of LeadsCon and I’m eager to witness the second-act tradeshow of LeadsCon founder Jay Weintraub.  Jay has partnered with Dave Wengel and together they launched the Daily Deal Summit in the hopes and expectations that it will grow and blossom in a way similar to that of LeadsCon.  And who can blame them?  This space is WHITE HOT.  While it took the LeadsCon ecosystem some 10-15 years to grow into ~$3 Billion footprint, the Daily Deals space has taken little more than 2-years to grow into a $4+ Billion ecosystem.

Here is my simplest possible explanation of how Daily Deals work:

1.        Consumers love deals and love saving money.  Consumers buy products and services from many local merchants in their community.  Local merchants would love to grow their business via advertising to those consumers.

2.       Offline advertising is typically too risky and too costly for most local merchants.

3.       Online advertising heretofore has been a mis-match for local merchants (and much more appropriate for national/brand advertising).

4.       Daily Deal Providers bridge this gap by allowing merchants to grow their business via performance-based online advertising.

5.       Daily Deal Providers acquire an email address of a consumer in the community of a local merchant.

6.       Daily Deal Provider secures a special deal from the local merchant and emails the deal to the consumers in the community of the local merchant.

7.       Consumers who wish to take advantage of the special (typically one-day-only) deal will click on the email offer and submit their information and credit card info for billing.

8.       Consumer receives a coupon/voucher to use to redeem the special deal offer with the local merchant.

9.       Daily Deal Provider sends a check to local merchant that amounts to the total sales executed by the consumers prior to the expiration of the deal, minus the fee/commission kept by the Daily Deal Provider.

10.   Consumers typically redeem their coupon/voucher with the local merchant.  Some do not.   The “breakage” of the consumers who do not redeem their coupon/voucher is absorbed by the consumer themselves, not the local merchant nor the Daily Deal Provider.

Many variations of the process described above were tested, but this specific process was galvanized by LivingSocial and Groupon –  the two players credited with launching and utterly dominating the space – in 2008.  The easiest way to describe the Daily Deals ecosystem is to first provide key information on Groupon and LivingSocial:

Groupon At-a-Glance

Founded 2008

Founder/CEO Andrew Mason (musician)

Location: Chicago, IL

Now operating in approximately 30 countries

Total Funding to Date:  >$1 Billion (NEA, Battery Ventures, and DST)

Estimated 2011 Revenue: $2-$3 Billion :-O

Widely accepted as the fastest business to achieve $1 Billion in annual sales EVER

Acquired dozens of similar businesses, both domestic and abroad

Groupon rejected a $3 Billion buyout offer from Yahoo! in October 2010

Groupon rejected a $6 Billion buyout offer from Google in November 2010

Groupon is expected to go public in 2011 or 2012 with an IPO valuation of $25 Billion

LivingSocial At-a-Glance

Founded 2007

Although founded a year before Groupon, it did not offer daily deals until after Groupon

Founder/CEO  Tim O'Shaughnessy

Location: Washington DC

Now operating in approximately 12 countries

Total Funding to Date:  >$600 Million (Steve Case, Grotech, USVP, Lightspeed, Amazon.com, T. Rowe Price)

Estimated 2011 Revenue:  >$1 Billion

Groupon was not represented at the Daily Deal Summit in any wway.  LivingSocial was not a sponsor, but was represented by a senior executive on the first panel discussion.

While Groupon and LivingSocial were frequently mentioned and referred to throughout the summit, the event was clearly aimed at exploding ecosystem of Groupon/LivingSocial competitors, non-competitive meta-business-models (such as Daily Deal Aggregators, Daily Deal Exchanges), and support business (such as email service providers, white-label daily deal technology providers, data/analytics providers, etc.).

A way to further describe the ecosystem is to provide some color on other business categories in this space besides the two big behemoths.

Daily Deal Providers – Groupon/LivingSocial Competitors

Groupon and LivingSocial have spawned hundreds of fast-followers.  Daily Deal Providers are often referred to as “Deal Sites.”  There are reportedly hundreds of “Deal Sites” in operation.  Below is a list of a select few that were represented at the Daily Deal Summit:

Gilt City (deals last a week, not a day)

BuyWithMe (deals last a week, not a day)

HomeRun.com

Zozi (focused on “Activity” deals such as Boating, Skiing, Scuba-diving, etc.)

Coupon Mob (focused on Daily Deals from National Retailers)

DealOn

Daily Deal Aggregators

The Daily Deal ecosystem has also already spawned many Daily Deal Aggregators, a meta-layer above Groupon, LivingSocial, and their competitors.   Some of these aggregators include:

Yipit

Tippr (THREE deals per day – discounts increase with additional consumer signups for the deal)

Dealery

Yahoo! Deals

Deal-aggregating is a fairly intuitive service.  After all, consumers care more about the deal and its relevance to them than they do which provider sourced the deal.  But the thing that was unclear to me was how Aggregators made money from the aggregating.  Perhaps they receive an affiliate commission from the Daily Deal Provider, but I doubt 100% of the deals being aggregated would offer such a commission.  Yipit appears to be the dominate player in this Daily Deal Aggregator space and seems to have found a unique way to make money from their aggregation process – sell information/data/analytics of Daily Deals B2B to other players in the ecosystem.  The Yipit co-founders presented at the Daily Deal Summit as a panel moderator and keynote speaker respectively.  Both were obviously extremely knowledgeable and dialed-in.

White Label Providers

Many technology providers offer White Label solutions for businesses that can SELL Daily Deals but not necessarily GET Daily Deals or vice-versa (but primarily the former, less the latter).  Some Daily Deal Providers also offer Co-branded solutions for businesses that can help to SELL Daily Deals.  A list of examples is below:

Co-branded White Label Providers

BuyWithMe

Groupon

Supply & Demand = Get Deals & Sell Deals

They key to success in this market-making process is to appropriately reconcile supply and demand.  In other words, Daily Deal Providers must both GET deals and SELL deals.  If either side is out of balance with the other, this market-making process become inefficient and probably unrewarding for all three constituencies – the consumer, the Daily Deal Provider, and the local merchant.

Here are additional points to make about this current process:

Daily Deal Providers acquire email addresses of consumers.  Once the cost (if any) of acquiring an email address (along with permission to send daily offers to the email address) has been incurred, sending daily offers via email is done with virtually no additional cost to the Daily Deal Provider.

Daily Deals with an expiration or deadline create a sense of urgency with a consumer.

Daily Deal offers in the inbox of a consumer typically command significant attention from the consumer.  Most consumers are constantly checking their email inbox for new emails and are frequently re-reading emails that were not deleted after the previous reading.

Daily Deals that are particularly attractive/relevant to the consumer are often forwarded to friends/family/colleagues of the consumer, allowing the email acquisition process of the Daily Deal Providers to enjoy significant viral benefits.

Daily Deal providers need an e-commerce (read: credit card) transaction to occur in order to make money.

Daily Deal providers have an incentive to persuade local merchants into heavily-discounted offers, as it will increase the conversion rate of the offer and the Daily Deal provider experience zero margin compression as a result (even though the local merchant does).

Daily Deals that are purchased by the consumer but never redeemed with the Merchant is referred to as “Breakage.”  Consumers currently “eat” this breakage, which has led many to question the sustainability of this model.

The term “Flash Sales” seems to be used somewhat interchangeably with Daily Deals.  Presumably, the difference being that “Flash Sales” occur less predictably than Daily and also may last until all the inventory of the item(s) being “Flash Sold” are depleted.

With this premise in mind, it’s easier to understand the nature of most Daily Deal offers such as dining at a nice restaurant, a wine tasting, a helicopter ride, a spa treatment, etc.

As a result, however, the local merchants that provide need-based products or services (e.g. locksmiths, plumbers, electricians, dry cleaners, etc.) that would probably embrace Daily Deal-style advertising to grow their respective businesses have been largely overlooked by the Daily Deal Providers.  It’s hard to blame the Daily Deal Providers for this omission, since need-based product or service deal offers simply won’t convert nearly well enough consumers in order to warrant the effort.  Thus these need-based product or service merchants are left with traditional advertising methods such as the yellow pages.  Some of the more progressive merchants in this category will venture into online advertising via Craiglist (for free), or paid options such as Google Adwords, or local advertising service providers such as Yodle or ReachLocal.

Perhaps the most profound revelation to me coming out of the Daily Deal Summit was that it’s a hits-driven business.  In other words, a small percentage of the offers are the ones that make most of the revenue (similar to industries such as Pop Music, Video Games, Venture Capital, Class-action Lawsuits, etc.).  Moreover, everyone claims proficiency in predicting the best money-making deals, but the hits-driven results suggest otherwise.

State of Industry – Leadership Discussion

Moderator – Perry Evans, Founder & CEO, Closely, Inc.

Jared Kopf, Founder, HomeRun.com & OfferEngine

Jake Maas, SVP Business Development, LivingSocial

Andrew Moss, Founder & Chief Strategy Officer, BuyWithMe, Inc.

Jed Nachman, Vice President of Sales & Client Services, Yelp

Nathan Richardson, President, Gilt City

Denial of “Deal Fatigue”

Commerce as Content: Montetizing Audiences – The Publisher Panel

Moderator—Jim Moran, Co-founder, Yipit

David Edwards, VP Sales & Operations, Spafinder, Inc.

Jonty Kelt, CEO, Group Commerce

Rich Razgaitis, CEO, DealOn

Mike Rothman, GM Thrillist Rewards

The Money Panel – Bankers, VC’s, and Valuations

Moderator—Tolman Geffs, Managing Director, The Jordan Edminston Group, Inc.

Blake Bartlett, Investment Professional, Battery Ventures

Suzie Brown, CMO, Valassis (absent due to illness)

Ben Choi, Principal, Maveron

Ken Kharbanda, SVP Corp Dev, kgbdeals

James Min, Managing Director, Montgomery & Co.

Ben pointed out:

Fire up a Wordpress account for $100/mo, go to a local Yogurt shop and get a deal, and boom, you’re the Groupon of Yogurt.

Tolman added that he thought he saw a couple of people bolt for the exit as soon as they heard that incredible idea.

Similarity to Val-Pak

James… Valassis = $2.5 Billion in Revenue sending stuff to consumers that they don’t want.

Afternoon Keynote: How Google and Facebook Will Impact Daily Deals

Presenter: Vin Vacanti, Co-founder & CEO, Yipit

Go West of East. Just Leave Here – the International Daily Deal Market

Moderator – Brad Hargreaves, Founding Partner, General Assembly

Anton Bernstein, Founder & CEO, Lookingo

Gerardo Giacoman Colyer, Director General Cuponzote

Kunal Merchant, Marketing Director, Exclusively.In

Maybe THE Best Presentation EVER on The Power of Exchanges and Real-Time Bidding:

Presenter:  Zach Coelius, CEO, Triggit, Inc.

Zach was soooo good. As usual. Just a naturally gifted and charismatic speaker that knows more about Adtech than anyone.

Email Optimization – Delivery, Personalization, and More

Moderator – James Walker, CEO, Inadco

Auren Hoffman, CEO, RapLeaf

Barry Abel, VP of Field Operations, Message Systems, Inc.

Neil Capel, CEO, Sailthru

Matt Keiser, CEO, LiveIntent, Inc.

Matt Keiser is crazy like a fox.  I had never met Matt before the summit.  At lunch, however, Matt walked around the lunch tables completely covered by Perky Jerky all Velcro-ed to his shirt.  He was giving the Perky Jerky away for free so that he could hand you a flier about his business and his card.

Sounds outrageous, right?

Wrong.  It was completely charming and Matt’s product offering is absolutely brilliant.  Real-time-bidding meets email inbox advertising.  It’s even worth trying caffeine-infused beef jerky in order to learn about this pitch.

I was pleasantly surprised to see my friend James Walker moderating this panel.  Email is #winning! :-)

Auren’s business takes an email address in from a customer and pushes back out data.  It’s brilliant and has many practical applications in email marketing and up and beyond email marketing.

I had the pleasure of dining with Neil Capel the night before this panel, and I’m happy to report that he’s a huge Douglas Adams fan like me.  After all, 42 is indeed mostly harmless.  Neil’s business is doing interesting tracking/loggin/analytics/data + actions in email marketing.  For the first time ever, I heard the musical term “cadence” used in an email marketing context by Neil.  “Change your cadence” means stop over-delivering.

Conclusion

So, in coming full-circle, why did a Lead Gen guy attend a Daily Deal Summit?  Well, my first objective was to determine that difference between Lead Gen and Daily Deals.  I believe I understand much better now.

Current Lead Gen offers tend to focus on big-ticket items that consumers NEED, but don’t necessarily WANT.  For example, consumers don’t want auto insurance necessarily, but they have to pay for it in order to drive.  Consumers don’t want a mortgage per se, but the need it to buy a house.  Consumers don’t want to go back to school for a degree, but they want a bump in pay grade or a more fulfilling career.  Daily Deals, however, ignores what consumers need and focus like a laser on what consumers WANT.

That said, I see an eventual intersection between Daily Deals and Lead Gen, primarily driven by the access to the email inbox enjoyed by Daily Deal providers.  As the Daily Deals space matures, normalized, and becomes more competitive, national Lead Gen offers may ultimately yield a higher effective CPM for the Daily Deal providers.  Call me crazy, but I can imagine a day where I see an ad for South University Online or LendingTree from Groupon instead of an offer for 50% off of laser hair removal.

Stay tuned and watch this space! :-)

SPF