50% Off – Overvalued Business Model

21 Jul

Another day, another daily deals site.  At the DC launch party for Atlanta-based Scoutmob last week, I found it almost comical how hard these start-ups try to differentiate themselves. Much like the Williambsurg-bound hipster who scours vintage markets high and low in an effort to craft an identity wholly his own, only to emerge as a mustache-bearing, prescription-less glasses wearing caricature of a stereotype, Scoutmob cannot escape the fact that at its core, the company is just another coupon peddler.

Scoutmob launch party in DC

The formula is simple: line up local restaurants and service providers to offer one-off, loss-leading deals promising savings of 40-90%; hire copywriters to craft quirky and witty descriptions of said local businesses; fund aggressive and expensive digital marketing campaigns with revenues from prior deal sales; parade growth charts in front of VC firms to attract tens of millions of dollars in additional investments; expand to other cities by hiring local sales staff and launching expensive marketing campaign.

“But we’re different,” they say.  The hundreds of daily deals sites might be able to create unique brands and tweak the underlying business model (i.e. don’t pay for the coupon until you use it, or $5 from every deal sold goes to a charity), but the consumer doesn’t care who his drug dealer is, he just wants to get high. There is absolutely zero brand attachment to a daily deals site, because 50% off your local sushi joint saves you the same amount of money regardless of the company paying the liberal arts grad who wrote the cutesy email or designed the banner ad that inspired you to “buy now”.

The fact that Living Social and Groupon are expected to reach valuations of up to $15 billion and $30 billion, respectively, after IPOs this year is completely irrational. It will be especially interesting to see how the traders on Wall Street and in hedge funds react to the IPOs; I’m sure the “greater fool” theory will be as easy for analysts to explain to their portfolio managers now as it was 12 years ago.

An interesting Business Insider interview with a former LivingSocial salesman made me breathe a sigh of relief, as the commentariat and the interviewee shared my point of view regarding the insanity around the daily deal model.  Daily deals will continue to flood our inboxes as long as VCs keep throwing money at them and salesman convince restaurateurs to give up weeks of profitability for a little bit of cash up front.

It’s impossible to predict when exactly the proliferation of daily deal sites will end, or at least reach a sustainable equilibrium, but you can mark my words that some point in the future, we’ll see the following headline in the Wall Street Journal:  “50%-off Daily Deal Stock: Investors Flee as Bubble Bursts”

(See more about the daily deals bubble on the Motiv blog: http://motv.st/pl6KX5)


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