People love deals. Merchants need customers. And online coupon dealers are building empires as a result.
In the three years since Chicago-based Groupon popularized the model, the online discount industry has grown to include more than 400 similar Web sites across the country, projected to net an estimated $2.67 billion in revenue this year, according to Local Offer Network, which operates daily deal platforms.
Groupon and LivingSocial — run by Tim O’Shaughnessy, the son-in-law of Washington Post Co. Chairman Donald E. Graham — currently dominate the market. Digital research firm comScore said both companies have seen their audiences triple over the past year, drawing between 8 million to 12 million unique visitors online last month alone.
We decided to take our own look at this emerging marketplace, and spent the past week or so using online coupons to eat lunch, dinner or dessert.
Though I’ve been signed up with Groupon, LivingSocial and The Washington Post’s Capitol Deal for months, this was the first time I’d used any of the discounts.
I wanted a glimpse of the infamous expiration-day rush, when streams of customers pour into stores to redeem coupons. But since all of the deals that popped into my inbox were months away from expiring, I opted for a LivingSocial “instant deal” that requires same-day purchase and use.
Deal of Choice: Hello Cupcake. Offer: $10 worth of treats for a mere $5.
About 30 minutes before closing, I strolled into the Dupont Circle cupcakery. A few patrons milled about taking bites of their palm-sized confections, while the two salespeople threw me a cheery hello.
I pulled up the deal receipt on my BlackBerry and started to tell the servers about the coupon, when one whipped out an iPad and found my name on a list of coupon holders. Fancy. Caitlyn, the iPad-toting cashier, explained that the store had participated in several other LivingSocial deals and had the process down.
“We just did a $1-for-$10 deal and had a line down the block. So it goes faster if you’re organized,” chimed in the other server, Emily.
Just as I started scanning the trays of fluffy cupcakes, an army of customers entered. I had no intention of buying more than two. But Caitlyn pointed out that at $3 each, I would not receive my full discount. I decided on a four-pack and paid the $2 difference. That turned out to be the popular choice, as most everyone else in line — all instant-deal devotees — did the same.
“This is my fifth time using LivingSocial,” explained Shawna Stich while having her four-pack rung up. “Since they introduced the instant deal, I’ve been using the site a lot more.”
While my cupcakes were tempting, I figured I should eat dinner first. So I headed to Pizzeria Venti in Alexandria.
Offer: $20 worth of food for $10. Purveyor: Groupon.
My server, Valerie, informed me up front that the coupon didn’t cover alcohol or the tip. The menu was filled with inexpensive pasta and pizza dishes. Dining by myself, I had quite a lot to order to hit $20. After an appetizer — clearly meant for four — and an entree, I needed to be rolled out the door. And I still came up $2 short of $20.
Valerie, sympathetic to my dilemma, suggested the mango mousse pie to go. At $5 a slice, the dessert put me over the limit, but I got more than my money’s worth.
I was one of two people to redeem the deal that day. Valerie said customers usually stream in the first week or the last day — Nov. 11 in this case. The franchise store, she noted, had done a few LivingSocial and Restaurant.com deals in the past.
These deals, however, come at a cost.
“We’re certainly not making any money off these coupons, but it has been a great marketing tool,” explained Joseph Renee, one of the store owners. “In three or four days we had hundreds of people sign up for the Groupon deal. We had to cut it off at 750 people. Anything more would be too much to bear.”
It’s critical for merchants to have a set objective and reasonable expectations when entering into a discount deal, said Utpal M. Dholakia, associate professor of management at Rice University’s Jesse H. Jones Graduate School of Business.
Customers may go over the allotted amount, as I did, allowing merchants to make a little money. Big windfalls tend to be rare, he said.
Late last year, Dholakia released a study of 150 businesses across the country that employed Groupon promotions. Sixty-six percent found them profitable, while 32 percent lost money. Among service businesses, restaurants fared the worst, while spas reported the most success.
Coupon companies take anywhere from 25 percent to 50 percent off the top. Let’s say it’s a $10-for-$20 deal. The merchant winds up with $5 and is out $15 worth of food and service. Factor in operations costs like manpower, said comScore analyst Andrew Lipsman, and the deal looks a lot less attractive to the merchant.
That is, unless the merchant parlays the deal into customer retention. Lipsman points to a recent Quiznos deal on Groupon offering a punch card for eight sandwiches or salads, valued at $50, for half price. “If you can get them to develop a habit, then that may lead to a long-term habit,” he said.
Checking out Web coupon deals has become part of my daily routine. Every morning brings a flood of offers via e-mail from Groupon, Specialicious, the Capitol Deal and others.
I settled on a LivingSocial instant deal for Cafe Luna, an easy-to-miss spot in Dupont Circle tucked below a Middle Eastern restaurant. The cafe offered $15 worth of food if I bought a $10 coupon.
Buying online was easy; the site quickly sent a text to my BlackBerry with a discount code. But the long-standing restaurant’s process didn’t feel quite as high-tech. When I told my server I had a LivingSocial instant deal, she said she knew nothing about it and went to find a manager. The manager copied down the code from my phone by hand and processed the discount.
At the brand new brgr:shack in Ballston two days later, Navid Sakhi, one of the restaurant’s owners, waved away my phone and instead quickly found my name on an iPad displaying a list of coupon-buyers.
The deal gave me $15 in food for my $8 coupon purchase at the three-month-old gourmet burger spot. It had avoided the typical one-day deal programs, wary of horror stories featuring restaurants overwhelmed by customers and operating at a significant loss, Sakhi said. But the instant-deal program allowed brgr:shack to dip its toe in the Web coupon world.
Thus far, the restaurant has seen mostly modest increases in business, though it got a big boost when LivingSocial sent out an e-mail blast one day.
“To us, it is worth it to get the exposure and be able to attract people that didn’t even know we existed,” Sakhi said.
— Marjorie Censer
When it comes to food I am not an early adopter.
I was certainly reminded of that when I made my first foray into the online deal world.
I started with a suggestion from a co-worker that I consider a deal on sowhatsthedeal.com, for a restaurant I had never heard of, Via 19. I visited the Web site, found the deal— $10 for $20 worth of food and drinks — clicked “Deal Me In,” punched in my e-mail address and a password, and arranged to meet a friend there that night.
Then I got an e-mail reading thusly: “*Quick note: Your credit card will not be charged unless we get enough people. Once the minimum is met, your coupons will be available in your account within 24 hours.*”
Apparently, a certain number of other people also needed to purchase this deal before it actually became a deal. Who knew? Feeling old and foolish, like my grandmother trying to use my cell phone, I canceled my plans.
Two days later I decided to try to find a simple lunch I could eat that day. I checked out Groupon, but the featured deal was for a hot air balloon ride. Then I tried Capitol Deal. Offers there were for a sailing cruise and $15 off $30 worth of tea.
When I tried LivingSocial, I found “instant deals,” a list of discounts that would expire in a matter of hours at easily located restaurants. Perfect. I chose an Indian restaurant, Aroma, a few blocks west. My deal, for $5 for $10 of food, arrived via text message, a novel concept for me. Excitement!
I was a little surprised to see white tablecloths when I walked into Aroma, but there was a good lunch crowd, the delicious smell of curry, and a handy takeout menu. I ordered a veggie dish, Shabnam Curry, and some rice. When it arrived, I pulled out my BlackBerry to display my coupon, nervously hoping for $5 off as the server rung up my bill of $14.08.
He looked at my phone briefly, then gave me an empathic look, as though I had wandered into his restaurant and asked for directions to somewhere far, far from here.
“LivingSocial is for eat-in only,” he said.
Well then. As they say on Twitter, #fail.
— Jonathan O’Connell
For every neophyte in the coupon scene, there are dozens of veterans for whom the standard $5-for-$10 lunches are a snooze. Like any deal junkie, they are chasing bigger, better offers. Or at least that’s what the coupon sites are hoping, as they venture into more ambitious (meaning pricier) travel, entertainment and service deals.
We couldn’t help but notice the paucity of restaurant offers on some sites, as many have begun to offer vacation and higher-cost deals. The profit margins on a hotel room look a lot better than any dinner offer.
But comScore analyst Lipsman cautions that consumers, at least for now, are wary about shelling out a lot on daily deals. Most transactions, he said, fall within the $10-to-$15 range because “it’s easier to buy when the risk is low and a lot more thought has to go into substantial purchases.” At the heart of the success of these coupon sites, he added, will be their ability to “ensure the quality of the experience as it scales.”
Some people like deals; my friends and I, a crop of recent college graduates, live by them. Our social outings are often based on the daily coupons that LivingSocial and Groupon deliver directly to our inboxes.
We’ve eaten Latin-infused sushi, visited the Newseum, and in a few week’s time, you’ll find us frantically paddling down the Shenandoah River. All new experiences, all at a discount.
But it’s impossible to plan every excursion in advance. So before meeting a friend for lunch last week, I bought an $8 voucher from LivingSocial for $15 worth of food at Old Dominion Brewhouse.
The trouble with making decisions in an instant is that you can change your mind just as quickly. Case in point: About a block into our half-mile jaunt, my friend suggested we pick a closer place.
The instant deals are refunded if they go unused, allowing us to change course while on the move. Standing at the corner of M and 14th streets NW, I snapped up a $10 voucher worth $15 toward the bill at the Beacon Bar & Grill near Dupont Circle.
That flexibility isn’t always available at deal sites. But when it is, the dealmaker typically will send a coupon to customers via text message without any upfront payment. The merchant then pays a flat fee for each patron who redeems the deal at his store.
— Steven Overly