washingtonpost.com
LivingSocial deals draw mixed merchant reactions

By Steven Overly
Monday, December 6, 2010; 8

Sweet-toothed Washingtonians have no shortage of bakeries to sate their hankering for a gourmet cupcake. So Aaron Gordon, owner of Red Velvet Cupcakery and the frozen yogurt joint Tangysweet, regularly tries to sugar the deal.

He routinely offers big discounts through online coupon purveyor LivingSocial -- despite losing money every time. It's head-scratching logic at first glance, but Gordon regards the deals as primarily a marketing ploy.

"We believe strongly that those LivingSocial customers who have never tried us before will come back over and over again and we'll become their shop of choice," Gordon said.

For many merchants, the deals bring mixed results. Some local vendors said they struggled to make up for the money they lost in the deals, in hopes customers will return again and pay at the regular price.

The merchant attitudes are key to the future of the group-buying Web sites, such as District-based LivingSocial or Chicago's Groupon, that are suddenly garnering interest from big Internet players. Amazon.com funneled $175 million into LivingSocial just last week.

Red Velvet's Gordon acknowledges that smaller businesses with fewer locations, tinier staffs or more time-consuming services may be overwhelmed by the rush of demand and monetary shortfall that can accompany the deals.

LivingSocial Chief Operating Officer Eric Eichmann said the company's sales force works with businesses to settle on terms that will be both favorable to buyers and economically feasible for the owner. The company's chief executive and co-founder, Tim O'Shaughnessy, is the son-in-law of Washington Post Co. Chairman Donald E. Graham.

"We always work with the merchant to think about what is this going to do," Eichmann said. "In some cases, we even get on the phone to help them with the spike of demand or in advance tell them they need to staff people."

Eichmann said more than 400 restaurants, spas, retailers and other venues in the Washington area have offered deals through the site since it launched here in July 2009. They also have enough in the queue to provide individual deals daily for Montgomery County, Northern Virginia and the District.

A weekend-long deal for services at the Zoe Salon & Spa locations in Gaithersburg, McLean and Fairfax sold 1,648 vouchers in July. Chief executive Andrew Tkach said his chairs were full in the following months.

The vouchers entitled customers to take 50 percent off their bill. Then LivingSocial took an additional 30 percent as the middleman. That meant Tkach lost money with each coupon-wielding client seeking a Brazilian blowout or Swedish massage.

Tkach said he wouldn't consider another online deal unless he could offer a smaller discount or if LivingSocial didn't scrape off such a large portion for itself.

"It is going to take me a year of retention before I am back to breaking even on all of those clients," Tkach said. "I've found that it's been extremely painful for my company to the point where it's caused pretty substantial harm at this point."

Not every merchant shares that experience, though.

Allen Wolff turned to Groupon and LivingSocial when revenue at bd's Mongolian Grill in Bethesda was down 6 percent compared with the year before. Back-to-back snowstorms last winter meant fewer patrons and his business needed a jolt.

He offered a deal that would essentially cover the cost of 1 1/2 meals, meaning he could still turn a small profit on a party of two. The net result: For the next four months, revenue was up 6 percent over the previous year.

"I think that there is a great benefit but I think it's also a slippery slope. If your clientele is really accustomed to coming in at a discounted price, then they're not going to come in at full price," he said.

Eichmann said most merchants have a positive experience and want to be featured a second time, though he could not provide an exact percentage. The company also published a "Merchant Bill of Rights" as a commitment to respect the businesses and allow them to protect their brands.

"We very much from the beginning took a leadership position to make sure we had terms that were fair to merchants and not sort of restrictive," he said. "We ultimately think if the merchant is not successful the business doesn't have any legs and is not sustainable over time."

Indeed, Ira Cohen, of investment bank Signal Hill's technology group, said the merchants and money they spend for what amounts to advertising are the main draws to investors or corporate partners.

"It is an alternative way to advertise and it is relatively inexpensive, though maybe for a small merchant it seems like it's expensive," Cohen said. "But the reach is just amazing."

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