Local ventures crop up to capitalize on coupon craze
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A local focus sets Portland-based Dealitious.com apart from national coupon sites, says founder Brian McLaughlin
Four local websites fashioned after the popular coupon sites Groupon and LivingSocial have popped up in the last couple of months, with three focused on the Portland market. The Maine Deal by MaineToday Media, DealsInME and Dealitious -- all in Portland -- as well as the Bangor Daily News' Daily Deal are all betting that this so-far remarkably successful form of Internet marketing will continue to be a lucrative way to make money online.
Groupon recently made news by rejecting Google's buyout offer of $6 billion and is, in its second year, reportedly making between $1 billion and $2 billion in revenue. Its dizzying ascent has launched a myriad of clones across the nation. In the past year, both traditional advertisers, such as city newspapers, and smaller entrepreneurs have jumped into the action.
But while there is a certainly a craze for daily deals sweeping the nation -- with marketers and merchants alike seeing a goldmine for new sales -- analysts are mixed about the prospects for the proliferating coupon sites.
"The reason it is exciting is that a lot of local merchants have become less and less comfortable just putting an ad in the yellow pages or in the newspaper, or buying a coupon and never being sure what their money is going toward," says Peter Krasilovsky, an analyst with the BIA/ Kelsey Group in Virginia. Meanwhile, these coupon sites provide "pure paying performance," he adds.
He and others in the industry have watched with amazement as the coupon trend has attracted an avalanche of new companies, both for the relatively inexpensive startup costs and the possibility of big payouts. "This thing has grown so quickly," he continues. "The estimates I made last June, that by 2014, it could be a $2 billion-a-year industry -- well, now we're seeing reports that Groupon is getting $1 billion by itself."
The founders of Portland's Dealitious and DealsinME, on the other hand, are predicting first-year revenues between $175,000 and $500,000. Krasilovsky says these expectations sound about right. "There's no reason why Groupon should be the only company that can make money," he says.
But Jim Boutin, the chief operating officer of Local Thunder, an Internet marketing company in Portland, offers a more cautious note. While he says it's exciting to see the creation of a new local marketing space, he also wonders if people could get burnt out on coupons. "My opinion is that people are going to get tired of deals," he says.
Groupon and LivingSocial both offer deals in Portland. In the end, Boutin thinks Portland has room for just a couple of these sites, and that the ones that come out on top -- and it could be the big or little players -- will be the ones that "have good connectivity in the marketplace," he says. The survivors will also have built their business most skillfully by offering compelling deals, writing strong promotional copy and compiling large e-mail subscriber lists.
The mechanics of the daily deal
The way the sites work is by presenting one daily coupon -- for a restaurant, salon, trip to the zoo, etc. -- and if enough people agree to purchase it, the deal is on. The sites collect between 30% and 50% of the coupon sales, with the remainder given to the merchant.
"The beauty of the group-buying service [for merchants] is three things," Krasilovsky says. "One, you don't have to pay any money upfront, and secondly, you can control how many offers you want to make available, and a third thing is ... you are also advertising to all the people who receive the offer even if they don't take advantage of it." A business will be promoted on the website for the duration of the deal, and its coupon is also sent via e-mail to the site's subscribers. Meanwhile, people can spread the word about the deal on Facebook, Twitter or other social media to encourage more people to buy the coupon and make the deal happen.
Groupon and LivingSocial allow users to type in their zip code to find coupons for nearby businesses. Local businesses featured recently in deals from Groupon and LivingSocial include a restaurant, spa, indoor karting facility and ski mountain.
Meanwhile, Brian McLaughlin, with his partner, Bryan Smith, recently launched Dealitious.com by offering $15 off a $30 meal at El Rayo Taqueria, a restaurant on Portland's York Street. Since then, he's offered half-off at a Portland car wash and discounts for meals at two more Portland restaurants.
He says while Groupon and Living Social could "squash him like an ant," he has the advantage of knowing Portland well. "What we bring to the table is an understanding of the local base," he says. "They'll do big chains, little chains. But based on our living in the area, we understand what people are looking for." According to Tod Dana, El Rayo's owner, just about 140 coupons sold for his restaurant.
McLaughlin will also split the revenue 60/40 with businesses to compete with Groupon and Living Social's 50/50 split, and he is offering another 5% to businesses if they self-promote the deal with their own Facebook, Twitter and e-mail campaigns. Meanwhile, DealsinME, started by Skowhegan native Josh Meyer and Khris Lalemand of Lewiston, is offering participating businesses more than 75%, Meyer says.
Pitfalls and opportunities
For the plethora of coupon sites starting up, success is not a guarantee, according to experts.
A recent study by Utpal Dholakia, an associate professor at Rice University's business school, found that Groupon promotions were profitable for only 66% of the businesses he surveyed, and that more than 40% of respondents indicated they would not run such a promotion again.
"Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal," Dholakia writes.
Krasilovsky counters this by pointing out that even if merchants lose money on the discount, they will reap its marketing benefits. "For certain types of businesses, maybe it doesn't make any sense, but for other businesses, it's so compelling because it allows them to cut back on other advertising and save money," he says.
He also sees possibilities for new coupon sites to augment their revenues if they branch out beyond just offering coupons to also provide services for businesses, such as managing subscriber lists to offer personalized promotions. They could also help small businesses write better ad copy.
Indeed, the whole business will continue to evolve, he says. "It is a remarkable industry," Krasilovsky says. "Google wanted Groupon because it wanted a way to work with small businesses. More and more people say they get their leads not with Google but with Facebook. This is a sales-oriented approach to social media."
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