COMMENTARY | Washington, D.C.,-based deal-of-the-day website Living Social has once again caused a major uproar on the Internet in regards to an offer that allows customers to purchase a $20 Whole Foods gift card for $10. The offer is identical to the $20 Amazon.com gift cards that were offered in January by the site, which is apparently a marketing effort to close the gap with industry leader Groupon.com.
There are 115,000 vouchers being sold every hour, which puts the site on pace to match the 1.5 million sales of the similar Amazon voucher from earlier this year.
The idea behind these deal-of-the-day companies like Living Social and Groupon is that by guaranteeing a large influx of customers, the websites cut a deal with local merchants to acquire services and goods for roughly 25 percent of the retail value. The websites then mark them up to 50 percent of retail value, and the discounted services become available after a certain number of customers purchase the voucher. The merchants are supposedly getting free viral marketing, which is based on successful marketing strategies and aimed at an upwardly mobile demographic with a large social reach.
Just by considering the business model, it seems everyone wins in the deal. Upon a closer inspection, though, it is clear that no one is really winning. According to Living Social’s website, customers usually spend $33.65 more than their voucher. If you are the average customer shopping at Whole Foods today, you will have $43.65 plus tax and travel costs invested to obtain $53.65 worth of organic groceries.
The savings for the customer ends up coming to 19 percent before you factor in the time and aggravation of printing your voucher and meeting the demands of the coupon, which is only valid on a single day. 19 percent is a good savings, but keep in mind that this is one of the site’s more valuable deals. The local JC Penny store regularly offers a similar $10 off coupon in my local paper, and I don’t have to do anything special to get it.
Since the sale is extremely popular, it would have likely gone viral on Whole Foods’ website, which would have generated far more direct marketing for the company. Living Social will profit more from this offer from a marketing standpoint than Whole Foods, and Whole Foods will likely end up dishing out over $10 million in free merchandise before the payment to Living Social. Whole Foods could have bought three Super Bowl commercials and had $1 million left to give to charity.
If Living Social wants to close the gap with Groupon, it will have to adopt a similar business model aimed at hyper growth. Groupon’s latest Series F and G capital raises netted a total of $1.08 billion. Of that $1.08 billion, $930 million went to pay off founders and earlier investors. With a total of $290 million in accrued merchant payments on the books, Groupon looks like a huge scam or Ponzi scheme.
So if the customers pay more, the businesses lose big and investors are getting ripped off, who is really winning in the deal-of-the-day lottery?