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Daily deal sites Groupon, LivingSocial lose steam in August

Groupon wins

According to CouponHQ, Both Groupon and LivingSocial lost a bit of revenue over the month of August. Laying blame at Hurricane Irene for the decrease in purchases and number of deals, Groupon fell by 4.8 percent and LivingSocial by 1.8 percent. However, revenue also declined for the companies in July. While Groupon’s average cost of a deal has risen over August, the number of Groupon vouchers sold is down by 14 percent. The average cost of a deal rose from about $40 in March to nearly $60 and the average price per voucher sold rose from about $20 to nearly $30. Groupon’s more expensive deals were travel related which also comprised 33 percent of the top grossing deals for the company in August.

According to the study, LivingSocial’s revenue has been bolstered by its partnership with Fandango in both March and June of this year. The promotion offered up two movie tickets for $9 for the same film and it ending up grossing about $9 million for the company. The amount of unique visitors to both companies fell in August again from a peak in June 2011. However, CouponHQ is waiting for the September figures to see if the trend continues in deals offered and purchased as well as overall traffic.

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Groupon has also decided to slow down plans for an IPO based off a story in the Wall Street Journal today. The company cancelled plans for an investor roadshow that was supposed to kick off after Labor Day and is making the decision to wait for a more stable stock market before continuing plans to go public. Groupon has attracted criticism in releasing financial information due to a strange accounting inclusion that drew the attention of the Securities and Exchange Commission. Analysts are also concerned about the increasingly overwhelming marketing costs as well as the lack of a path to profitability due to increased competition.

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Study: Partnering with a daily deal site is bad for Yelp rating

John W. Byers and Georgios Zervas of Boston University as well as Michael Mitzenmacher of Harvard began researching the effect of daily deals on the overall average of a Yelp rating. The trio looked at both Groupon and LivingSocial relationships with businesses that were listed on Yelp and found that the typical rating was 10 percent lower when a business participated in a daily deal. In addition, the volume of reviews increase by about 44 percent on average. Reviews that mentioned the phrases "coupon" or "Groupon" were typically 20 percent lower than the average review. This drop in ranking typically came out to a decline of half a star from Yelp's five-star rating system.
In a study conducted by Michael Luca of Boston University, the research found that an increase of one star on a Yelp rating typically increased the revenue of the business by 9 percent. While traffic gained from a Groupon or LivingSocial promotion may increase traffic in the short term, the declining Yelp rating may end up costing the business valuable traffic in the long term. Public relations representatives from LivingSocial were quick to draw doubt on the study and responded quickly to Launch claiming that the LivingSocial internal metrics were superior to external data studied by the researchers at Harvard and Boston University.
While Groupon's revenue is up in August according to an earlier report today, weaknesses in partnering with companies in the daily deal business are beginning to pile up. In a 2010 study of 150 businesses that partnered with Groupon, Forbes found that 33 percent of the group lost money on the promotion. Of that group, only 25 percent of customers spent more than the face value of the Groupon and just 13 percent returned to the business. Combine that loss of revenue in the short term with the likely decrease in Yelp rating and the risk involved in partnering with a daily deal site clearly increases.  

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Despite downward trend, Groupon revenue grew 13 percent in August
Groupon wins

Things may be looking up for daily deals giant Groupon, after all. According to Alexia Tsotsis at TechCrunch, the daily deals company gained 2 percent market share during the month of August, and saw its revenue surge 13 percent, increasing its revenue from $106 million in July to $120.7 million in August. The company's financial data comes via daily deals aggregator, Yipit, which analysed 30,000 daily deal offers, from a variety of companies, last month.
The increase in incoming cash is due to a 10 percent jump in the number of Groupons sold on each deal, as well as a 5 percent increase in the average price of the deals Groupon offers, Yipit's data shows. Groupon's travel offering, Groupon Getaways, saw its revenue grow substantially, from $5.7 million in July to $9.6 million in August, which accounted for 27percent of Groupon's overall growth for the month. 
August wasn't entirely a winning month for Groupon, however. As we reported last week, the number of deals actually fell `14 percent (though the cost of the deals went up).
This troublesome trend comes just as Groupon was forced to delay its IPO due to an unpredictable stock market environment -- or, at least, that's the "official" reason given by the company. Some believe, however, that the delay may be due to a Securities and Exchange Commission investigation over an internal company memo that may have violated the SEC's rules.
The company originally planned to go public immediately following Labor Day.
The complications around Groupon's finances began this summer, when the company decided to use non-standard accounting practices in its IPO filing with the SEC. 
 LivingSocial, Groupon's closest competitor, had a 3 percent dip in revenue last month, from $46.4 million in July to $45.1 million. The daily deal market grew 9 percent overall, jumping to $228 million for August, versus $208 million in July.
View the full Yipit report below:
Yipit August 2011 Report (09!10!11 Draft) Copy 2

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Groupon is winning the clone wars

Since filing its S-1 form earlier this summer, you could say that Groupon has been somewhat scrutinized. Its accounting metrics inspired rampant skepticism and CEO Andrew Mason is making a reputation for himself as something of a lovable-yet-loose canon.
There’s also the fact that Groupon’s business model has been called into question nearly since the company’s launch. While users were fanatically jumping on board with the collective buying scheme, business owners began to notice Groupon had its drawbacks. And as the site has grown, so has vendor criticism. The fact of the matter is agreeing to sell your product for half of its original price and guaranteeing that any customer with a Groupon will get the good for the marked down value isn’t a catch-all, and plenty of businesses suffered.
Despite the well-publicized drawbacks, the clones came. While there is household name Groupon rival LivingSocial, there is a veritable sea of wannabes: Tippr, Zozi, Town Hog, BuyWithMe, Travelzoo, MarkDown, Google Offers… the list goes on. And when a notable name drops a new deal-a-day site, there are whispers about whether it has an advantage over Groupon. Two stand out from the crowd: Facebook Deals and Google Offers. With their social graphs and Internet domination, both platforms seemed perfectly positioned at least make Groupon nervous.
But the market wariness, controversial quiet period, finger-pointing, and over-saturated market haven’t been enough to let a new rival take Groupon down a notch. This week, Facebook Deals shut its doors, and it isn’t the only site to be experiencing a lack of interest. Bloomberg reports that Yelp is cutting its deals salesforce team in half and moving focus elsewhere. Deals won’t disappear from the site entirely, but it’s certainly not inspiring.
“Rather than offer more and more deals of inherently declining quality to more and more folks over time, we want to make sure we’re only providing good, quality opportunities,” VP of corporate communications Vince Sollitto says. “While we think the deals business is a good one, it has never been a core focus of our offering.”
Facebook had a similar reason behind its Deals shut down. “After testing Deals for four months, we’ve decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local business. We remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals,” a spokesperson told us.
The fact that Facebook and Yelp are hampering their deal-a-day efforts is good news for Groupon—and not because it means this market space is a little less crowded. Both companies seems well-position to give this business model a go, Facebook with its infinite user base, social presence, and business pages, and Yelp with its intense focus and relationships with local business.
Daily deals researcher and associate professor at Rice University Utpal Dholakia thinks Groupon's veteran status works in its favor. “I think Groupon has an incumbent’s advantage on both sides of the transaction. On the consumer side, it has significantly higher awareness and usage rates among consumers in virtually all markets it operates in when compared to its competitors,” he says. “On the merchant side, merchants are much more comfortable with it and know what to expect based on their own previous experiences and those of others in the market. In line with this, I have heard from multiple other Groupon clones that they are having difficulty recruiting merchants to run offers on their sites. I expect this trend only to continue.”
It’s starting to look as if—despite the rabid jumping-on-board—a daily deals scheme isn’t something anyone can do. Everyone is certainly trying, from Amazon to the New York Times, and thus far the only site that can challenge Groupon appears to be LivingSocial. So this unproven business model that has gotten Groupon loads of flak might actually be something few can make work, and even fewer can make profitable. 
Yipit co-founder James Moran thinks it's too early to tell. Yipit tracks the industry, and Moran says it aggregates more than 30,000 offers per month. "I wouldn't say Groupon's competition is falling off. Most of the closures are smaller sites who have realized that scaling these businesses into huge companies is harder than they think." He says that the real challengers are experiencing more and more success, and it's eating at Groupon's profits. "Groupon and LivingSocial's market share was north of 90-percent in major US markets a year ago... [now] their combined share is down to 70-percent. Much of the fragmentation is being driven by gains by up-and-comers like Travelzoo, Bloomspot, Gilt City, and BuyWithMe."
It would be premature to say it's all smooth sailing from here for Groupon, and what it likely has to worry about most is that smaller clones will eat at its numbers--that and speculation we may be witnessing the beginning of the end of the daily deals era. But if it can continue to thwart efforts like we saw this week, it could somewhat shed its reputation as an investment risk.

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