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Big Deal
Comments () | Published December 3, 2010

LivingSocial isn’t likely to stop growing. “We’re in the second or third inning of the game right now,” O’Shaughnessy says. “It’s cool to be a nine-figure-revenue business and feel like you’ve got a long way to go.”

The company’s goal is to help local merchants spend their marketing dollars more efficiently and at the same time help local consumers figure out where to spend their money. As Groupon investor Ted Leonsis blogged, “Group couponing is a powerful tool and a positive breakthrough for small businesses. You get customers for free; no up-front media buy; and you get to keep the customer after they come in to your store. You also get to build your brand and you get data about who purchased. And best of all, you get to control what you offer; how many customers you want; and the like.”

While demand from merchants is still strong, the once-high profit margins on the coupon business are beginning to erode. Last year’s 50/50 revenue split between merchant and coupon company has moved in the merchant’s favor as competition has increased. Now more than 80 companies vie for business; Groupon and LivingSocial are by far the top two, but Boston-based BuyWithMe is coming on strong, and a Spanish clone has raised millions in venture funding overseas. The competition means that high-profile merchants can negotiate rates, receiving in some cases up to 90 percent of the revenue, with guaranteed sales and quick payouts. Both Groupon and LivingSocial are spending big money on online advertising in an arms race for e-mail subscribers.

Some backlash is developing against the model. While most businesses appreciate their group-purchase experiences, some have begun to complain about the process, revenue split, and overwhelming number of customers a big sellout can provide. The owner of Posies Cafe in Portland, Oregon, wrote in a September blog post that offering a $13 food coupon for $6 on Groupon, which sold nearly 1,000 coupons in one day, was the “single worst decision I have ever made as a business owner thus far”—a decision that forced her to draw on her personal savings to make payroll.

LivingSocial claims to work closely with merchants to ensure successful experiences and that they’re prepared for the onslaught of coupon-wielding visitors, but the model is still likely to shift in the coming years.

The long-term plan for LivingSocial is to make its deals ever more local and immediate—improving efficiency for businesses for which excess capacity is wasted. An empty table at a restaurant today can’t be sold tomorrow. An empty chair at a hair salon on Tuesday can’t be filled on Thursday. Ditto for a hotel room or a train, bus, or plane seat.

Eventually, fast-forwarding a few years and a few generations of technology, LivingSocial hopes people wanting to go out for dinner will have instant access to a constantly updated list of which restaurants are offering what deals for what nights. The question it wants to answer for consumers, Rainey says, is simple: “Is anyone more motivated than someone else for me to come to their restaurant tonight?

“It’s a far more revolutionary concept than people give it credit for. It’s not about coupons. It’s about customer acquisition. It’ll be a real-time marketplace. An owner could say, ‘It’s Tuesday night, it’s raining, my restaurant is empty, I’ll knock off $15 for anyone who comes out tonight.’ Right now we have a system where consumers aren’t rewarded for their time, expenditures, or loyalty.”

Rainey says he foresees a world in which businesses will have two marketing budgets—a broad one for brand building and awareness and a separate one for attracting customers on, say, Tuesday night.

Bringing more efficiency to those markets, improving the lives of business owners and customers, is an exciting proposition for O’Shaughnessy. When he considered taking the LSAT for admission to law school, he found he enjoyed the test’s logic problems—and continued buying practice tests even after he ruled out law school.

Last year, he purchased a Segway to explore whether the machine heralded a new era of local transportation. O’Shaughnessy and his wife, whom he met at Revolution Health, live near DC’s U Street, Northwest, some 1.4 miles from LivingSocial’s Chinatown offices. Walking to the office takes 35 minutes, commuting via Metro takes 27 to 33, and driving and parking takes 12 to 13 if he can find parking quickly. The Segway takes just 11 minutes with no parking search involved.

“That’s efficient—it could save 40 minutes a day,” he says. “So why aren’t more people using the most efficient technology? Is it because there’s no network effect, no infrastructure to support it? Is it because it’s too expensive? How could it be made more likely to be adopted?”

Those questions apply equally to LivingSocial’s experiences. With close to 100 million users, the company, between its coupon business and its Visual Bookshelf and Pick Your Five apps, has lots of information about users’ tastes. Its success has much to do with how it harnesses that data and more efficiently tailors deals and experiences for users—and whether it can do that better than Groupon.

LivingSocial took the first steps in its next incarnation this fall with the October purchase of the New York–based boutique adventure company Urban Escapes. The concept, which LivingSocial is selling in five markets and plans to roll out nationwide, is part of its move into producing guided events. A recent Urban Escapes deal in Washington featured a Shootin’ & Drinkin’ outing—shotgun training followed by a Scotch tasting; 633 Washingtonians purchased the $80, six-hour trip.

“LivingSocial is about meeting new people and trying new things,” O’Shaughnessy says. “It’s doing things in real life with your friends.”

Says Batalion: “We say that you buy a Groupon but you join LivingSocial.”

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