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LivingSocial under fire: Can daily-deal sites keep offering huge discounts?

The hyper-discounts of online coupon dealers like LivingSocial have not created loyal customers. Some businesses are finding that smaller numbers of coupons – and smaller discounts – might be more sustainable in the long run.

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Meanwhile, LivingSocial, one of the next largest, is in 552 daily markets worldwide, according to spokesman Brendan Lewis.

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A prime gripe from many merchants is that daily-deal “groupies,” grazing for that day’s most outrageous deal, don’t develop any brand loyalty. From the businesses' perspective, one of the main goals of offering the deals is to drive repeat business, says Terrence Rice, a Milwaukee accountant whose wife used Groupon twice for her business as an aesthetician.

She sold 900 deals, of which some 450 were actually cashed in, but fewer than 20 customers ever came back, in spite of additional discounts offered to the coupon users.

“It appears that Groupon fosters 'Groupon jumpers' – individuals that strictly purchase Groupon for the deal with little or no intention of utilizing the service, product, or restaurant again,” he says.

Groupon did not return a call for comment, though its website notes that “97 percent” of the merchants who use Groupon are satisfied. Mr. Lewis of LivingSocial points out “it is the responsibility of the merchant to provide the kind of experience that will encourage consumers to return.”

The barrage of daily deals, however, appears to have normalized the expectation that another discount is just around the digital corner. Grace Lavigne, a public relations professional from New Jersey, confirms that once initiated into the joy of going to the movies for half-price, “I won’t ever buy a regular movie ticket again.” She says there are too many deals out there to pay full price, “and I always know that another one is just around the corner.”

The experience of Los Angeles photographer Stuart Townsley offers a different perspective.

Mr. Townsley offered a private photo session and a canvas enlargement portrait for $69. According to Townsley's press representative, other local photographers sent him hate mail for undercutting their business. He was accused of being naive, and worse – stupid – for selling his services so cheaply, and he was warned by others who failed with Groupon that the deal would destroy his business.

But with some careful management of the number of coupons issued and diligence with the customers who came in, “It turned out to be a very good experience, which has helped my business grow.” Townsley says.

This sort of strategic implementation is the key to the next stage of the daily-deal phenomenon, says Mr. Wray of NimbleCommerce.

“Groupon has proved two things,” he says. “Consumers love outrageous deals, and merchants can use coupons to drive traffic.”

But, he points out, the company model has not figured out the next stage, which is how to drive loyalty and deep engagement. Smaller scale coupon offerings – like Townsley’s – allow for the kind of merchant/customer relationship that builds repeat business, he says.

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