The Golden Days of Online Group Coupons are Almost Over

Groupon and Living Social are red hot as the two of the most successful online social couponing sites with IPO’s in the offing for both companies.  I’ve been getting the daily emails from both sites for quite some time now and upon occasion have purchased coupons for something I use all the time, or to try something I might not have without the incentive of the discount.

Accordingly I think these sites serve consumer needs since the consumer gets a good deal, and it serves (or should serve) the retailers in the form of sales promotion and even increasing a brand’s overall awareness.    But now is the time to make your best deal with either of these two fast growing companies, (Facebook is set to unleash its own social couponing platform any moment now) since the game will likely change very soon.

Here’s how it works:  Right now both Groupon and Living Social take a percentage (likely half) of the buy-in on the part of the consumer.  For example if you were to be offered a deal at a hair salon for 50% off hair coloring that normally costs $ 100, you would ‘buy’ a coupon worth $ 100 for $ 50.  Then the salon pays $ 25 to either Living Social or Groupon (at 50% of coupon value).   So the salon collected $ 25 on a $ 100 value.  Doesn’t sound so great does it?   Keep in mind that not everyone will actually redeem their coupon (at times more than 30% can go unredeemed entirely) and some people will not use the entire coupon value if they purchase something else with their coupon as the entire amount has to be spend in one trip.   And the retailer gets the cash up front before the consumer comes in to actually buy the product or use the service.

So it suffices to say that by using this discount strategy, retailers and companies alike are hoping to gain new customers that will come back again and again.    This is a fairly simple business model.  And it’s not going to last.

Ultimately these sites will become advertising vehicles like television and radio stations, magazines, OOH and other general advertising mediums that aid in building overall consumer awareness and hopefully stoke sales at the same time   So the future of social couponing may look like this:   Retailers or marketers pay a flat fee to access the Groupon or Living Social audience and then they will take a smaller percentage (than say 50%) of the value of the actual transaction.     A marketer might pay $ 1,000, $ 5,000 or more to reach a certain size audience and then also pay that smaller percentage of the coupon redemptions.

I think the present model is a better one for marketers but I cannot see it lasting since it is completely dependent on consumer redemptions.   Groupon and Living Social will be much more valuable once they can develop a more predictable revenue stream.    That does not happen in the present model but it would in my future model.

Get ‘em while they’re hot folks.  The bottom line is that Groupon, Living Social and (when it goes live – Facebook) will all be just another media buy and I fear that the small companies that are helping build their platforms now will be forced to seek out second tier (and arguably less impactful) couponing sites.

I’d be interested in your take.

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