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Comment by tomasien | Hacker News Reader

I know some of Living Social's original investors, and I approached them for an investment in my startup about 8 months ago. Part of our pitch was that daily deals solve and amazingly valuable problem in an inherently not-valuable way, and although our system would take less of a straight line, it would and already WAS solving the problem for a small subset of businesses in a more valuable and vastly more sustainable way.

They ultimately passed on the investment, our last gasp to survive, because "Living Social was obviously their flagship, and they didn't want something who's core value proposition was that Living Social was doomed, which is obviously isn't." That's very close to a direct quote.

This doesn't make me happy. I hope Living Social figures it out. They realized Daily Deals were doomed even before Groupon did and tried to work out other revenue streams. I hope this report isn't even true. But God damned if I didn't tell'm so.

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Do you think Daily Deals are a fundamentally flawed concept?

I tend to think there's nothing wrong with them other than an over-saturation of the market and a prevailing attitude that says all you need is a sufficiently large mailing list to win. But that's just my outsider's view.

Indeed. If you're a restaurant/spa/bowling alley in need of drumming up some business, the daily deals channel, with all of its issues, will still generate the most qualified leads for the buck. Other channels are newspaper or Yellow Pages ads (probably dead) or a combo of Google/Facebook micro-targeted ads.

The only, repeat the ONLY thing that matters, is cost to acquire a customer and the value of that customer to you in the term for which you can afford to measure. Daily Deals RARELY put you in the positive for that metric unless your conversions and retention numbers in the amount of time you can afford to measure are fantastic.

I think doing something that eats away 90% of a merchant's revenue is not sustainable in the long run and arguably something illogical if you just run it once too.

Daily Deals aren't doomed, it's just that businesses AND the people providing the platforms don't really understand how to take maximum advantage of price discrimination. Larger companies have already figured this stuff out and the way they structure their own deals, sales, and price matching should be looked to a a model.

Daily deals like Groupon are fundamentally flawed in certain markets.

The problem is that it rarely generates repeat customers and/or customer loyalty - they tend to generate customers that come once, when they have a coupon, and never come again.

So unless your business is high margin, you're almost guaranteed to lose money from daily deals.

Thus, it's very good for things like paintball and skydiving and very bad for restaurants.

It's not that they are flawed, it's more about the businesses that provide the services aren't in a great position to understand how to leverage the deal.

These can bring in a short term influx of customers but unless the small business has some sense about how to convert those "daily deal" people, it's just blowing money.

In the end, daily deal sites are just another marketing channel. It helps to bring people in but if you can't convert, your ROI will ultimately be negative. This isn't something that small businesses can't understand, it is just not how they view these sites... they only see dozens and dozens of people coming in the door.

"Daily Deals" are just one format for solving the physical businesses initial distribution problem. It's a one-size-fits-all solution that actually only works for high margin businesses.

For us, we solved this problem for bars, who have this really specific opportunity/problem where when they really need to fill up their bars at very specific times, when they're empty but didn't expect to be. The reasons are too numerous to mention, but it's something every single bar owner will tell you if they've thought about it at all.

However, other industries have other problems, and DAILY Deals solve so few of them. From our analysis, massage therapists and similar businesses (luxury, high margin, service based companies) were the only ones who benefitted across the board.

I think I'd say the problem is that Daily Deals is a fantastic and valuable service, but not a billion dollar business.

Daily deals works by drastic price cuts, the end. That means it costs the merchant far more than just what they pay the middleman. The middlemen can't charge more than pocket-change for the service or it just don't work.

So the future as I see it for daily deals sites is small companies making decent money charging huge numbers of businesses tiny commissions to promote their sales through largely automated platforms. It's perfectly suited to a ten-man company, which is why I personally think the over capitalized megacorps are doomed.

They are flawed unless you can do something about retention.

Has anyone tried the concept where the "deal" is that you go, name the site, and get a coupon giving you a deep discount the SECOND time you go back to that store? That would seem to make more sense. Because everyone that the store gives the deal to, has actually paid full price once. And wanted to go back. And if you've been twice, you're more likely to go 3x. And furthermore most of the failed leads were a sale, so nothing was lost.

This is not (initially) a retention issue. This is a pricing, inventory and product issue. The retention issue can be solved (I'll explain)

Daily deal sites that offer a discount coupon at a price to the consumer which they have already negotiated a steeper discount for themselves, while cheaper for the discount site, is too cheap for comfort for the vendor.

This is a negative incentive for the vendor to keep going with with discounts, thus reducing inventory. further, the discounts are typically on ephemeral things that people dont NEED but just want.

The model should be flipped a bit: offer progressive discounts on repeat business. i.e.: 20% off on first visit, 30% on second, 50% on third - etc.

Incentivise repeat business.

And we've just re-invented loyalty schemes.

(I know at the budget conscious end of the cafe/coffee business, the "buy $n, get the $n+1th coffee free" cards do pretty well around here. Not so much in specialty coffee places though, most of them do a good job of giving free coffee to their regulars pretty often. I rarely pay for espresso shots at any of my regular cafés if I buy them at the same time as a latté/piccolo/cappuccino…)

CVS, El Pollo Loco to name 2 that I've interacted with lately. When you buy something there, they give you coupons at the register for next time that are pretty deep. I'm guessing this is a proven effective marketing technique judging by the big companies using it.

So for a restaurant for example the coupon can be customized based on the age, gender, how many in the party and what they already ordered. The value of the coupons could be even computed in realtime, based on supply and demand + some safety rules built in. Everyone at a different times could get a different coupon for a different value.

The coupons that you're talking about are for specific products. The idea being that you come in to get that price on one thing, and wind up picking up others at full price.

Some stores offer coupons for your next purchase. For example, Gap gave me coupon for 20% off any one item if I complete their online survey. That's a pretty big discount, so that survey information must be pretty valuable.

I think that they don't expect you to come back for just 1 item. So I would guess that they value the engagement and increased chance of a trip to a store.

I don't know their margins, but I doubt a 20% discount has them losing much on that item.

CVS gives me on my receipt "$5 off next purchase".

Most of the supermarkets round here do it, whether in tokens (40% off your next milk purchase!) or points-based loyalty cards which can be exchanged for gifts when you've collected enough.

Very good point. I haven't tried the concept in the context of a deal site, but it absolutely works for a regular business.

I learned early on with my company that when people say things like "give me a deal - I promise I'm going to be your #1 customer if you give me a discount for my first purchase" that the best (for me) possible response is: "How about your pay full price now and the next time you come back I'll give you that 20% off you're asking for." Those that bite actually become loyal customers and appreciate it. Those that don't probably wouldn't have come back anyway.

And, btw, I learned the hard way that 99% of those "future #1 customers" never came back - even when I caved and gave a discount. Hence the revised model.

Or how about a free product once you buy 9 of similar value?

Punch cards are the original loyalty program, but I'm not sure how well they work for new customer acquisition.

Or unless you have an airline cost structure, with near-zero marginal cost. Haircuts, lawncare, beauty services, hotel stays, etc. are their bread and butter.

Daily Deals aren't a fundamentally flawed concept. We use them at my company and they are a great channel for us. They just need to be managed correctly.

Coupons have been around for years and will continue to exist as "deals" despite different distribution methods that involve others.

Give the market two to three years to consolidate and reach a sustainable level that doesn't overwhelm or burn the merchants and end consumers.

Whether or not they privately thought you were right, openly betting against one's own companies is rarely a prudent move for any investor.

Fun fact: Stripe is backed by three out of five Paypal founders.

In my layman's view, that's a prudent move, similar to neutral/risk reversal stock trading strategies. Of course VC is about more than just money, but still.

Is that true? Isn't that basically what hedging is?

The simple fact is that over the long (enough) run, there is no such thing as sustainable competitive advantage – markets change, grow, shrink, die – if you're not actively exploring what will replace your offering or share the market with it, you can rest assured that someone else is and eventually, they will enter your space.

So, IMHO, the smart money finds the best alternatives and bets on them too, at some point... (or they exit, if the market is simply going to die, but that's another angle).

I could invest $100 in two competitors, assuming that one will fail, but the other will be worth $1000. Risky - of course. A third company might come along and I end up with nothing. But still a reasonable strategy.

Off topic- dude, your startup is awesome. Automated bar crawls :) And in my cities first! Are you from Richmond/went to UVa?

Yes and yes. Wish we were doing more with it, but we are doing a re-launch soon and are launching native apps.

Too many of our deals are out of date, but soon that's fixed on the re-launch.

What was your old startup 8 months ago?

http://thecityswig.com/, but you emailed me so I'm assuming you figured that out!

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