Bad News for Small-Towners Seeking Daily Group Deals

Vendor Abundance Has Groupon, Living Social Skewing Urban -- for Now

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Want to get local daily deals online? Move to a big city.

Even as popular daily-deal sites such as Living Social and Groupon rapidly expand into new markets, social couponing remains mainly an urban pursuit. The average Groupon and Living Social user, in fact, is about 13% more likely to live in a metropolitan area with a population of more than 400,000 people, according to Nielsen Co. data, and about 10% more likely to live in a city with more than 3 million people.

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Top and bottom five indexing states for Groupon and Living Social visitors by state.

"It's not that Northeasterners are more wired than Middle Atlantic-ers. It's got more to do with where the sales forces of services like Groupon and Living Social are built out," said Ken Cassar, senior VP at Nielsen. "The engagement is highest where they've built out their sales-force footprint."

Areas such as Washington, D.C., Kansas and Illinois (home to Groupon's headquarters) top the state list of above-average Groupon users, while D.C. (home to Living Social headquarters), Nevada and Maryland rank highest in people more likely to use Living Social than the average online adult. West Virginia, Iowa and Kentucky index as the lowest users of LivingSocial, while West Virginia, Arkansas and Delaware skew less likely to use Groupon, according to the Nielsen data.

"Services like Groupon and Living Social work well for people in cities because there are an abundance of offers," Mr. Cassar said. "But that will change. When we look out 10 years, we see in big cities that services like Groupon, Living Social, Facebook and Google will have dedicated sales forces, but when we look at smaller markets, we see a model where a salesperson calling on local merchants would have a kit or portfolio of those products to offer."

Smaller towns are also less attractive to the big online dealing companies in terms of revenue and expense, said Mark Fratrik, VP at BAI/Kelsey Group. "The pickup rate (by merchants) and total number of subscribers are lower, but you still have to do the same amount of work with the local retailers," he said. BAI/Kelsey Group estimates the social-couponing market will grow to $3.9 billion in 2015 from $873 million in 2010. "I would guess about 75% to 80% of the revenue is in the top 100 markers right now, but as the services grow, I would bet that percentage gets a lot lower by 2015," he said.

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His colleague, BAI/Kelsey Group analyst Jed Williams, added, "The issue in the bigger cities now is more about fatigue and fragmentation and a bit of being tired of it already, but the issues in smaller areas are more about how do we get something off the ground, is there enough interest, and how do we market it?"

For now, small-town residents who are interested are less likely to get many close-to-home offers. Nielsen's Mr. Cassar, for example, subscribes to daily-deal services, but from his home in a small Connecticut town. The closest offered deal so far has been in Hartford, Conn., about an hour away.

LivingSocial Director of Communications Maire Griffin said the company does receive many emails from consumers lobbying to have the service to come to their town. Living Social uses that level of demand, in fact, as a key factor in determining which markets to launch in next.

And launching they are. Living Social launches in almost one market every day. The not-yet-2-year-old company is now in 151 daily-deal markets in the U.S., and while many of them are large, like New York, Boston and Miami, there are smaller metro areas as well, including Fort Collins, Colo., and Cedar Rapids, Iowa.

Its go-to market strategy, however, involves set-up time, Ms. Griffin said, as the company always hires salespeople in the local market before launching. "We believe you should be able to shake the hand of the person you're doing a deal with," she said. "And those feet on the street know the local markets and know what's popular and where are the hotspots better than a salesperson across the country could."

However, national deals that large- and small-city dwellers can tap into have proved to be some of the biggest for the company. Its $20 Amazon card for $10 in January was a best-ever seller, with 1.4 million cards, or $14 million in sales, topping Groupon's estimated $11 million swift sale of $50 Gap cards sold for $25 last August. A recent Fandango deal of two movie tickets for $9 raked in $1 million in sales, Ms. Griffin said.

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