Summary:

Earlier this week Yelp said it was revising its daily deals strategy after encountering some “real challenges” in the space. According to new data from daily deals analysis firm Yipit, those challenges were indeed severe — and they may not be unique to just Yelp.

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Earlier this week, Yelp CEO Jeremy Stoppelman announced that his company was revising its daily deals strategy after encountering what he said were some “real challenges” in the space. According to new data from daily deals analysis firm Yipit, those challenges were indeed severe. But are Yelp’s daily deals struggles unique, or are they evidence of larger flaws in the group buying business model?

Yelp Deals saw rocketing revenues in its earliest days, but it has suffered from steady sales declines for the past five months, Yipit reported in a blog post published on Thursday:

Graph sourced from Yipit.com

The decline at first may have been attributed to the surplus of deals Yelp was providing; in May 2011, for example, Yelp Deals had 69 offers. But even after it attempted to focus on quality over quantity by sending out only 26 deals in August 2011, Yelp’s revenue per deal remained depressed, and its overall revenue sunk even further, Yipit reports.

Daily deals departures

While Yelp Deals will not be closed entirely, the company cut the head count of its daily deals team in half and still considers the segment a “work in progress,” according to Stoppelman’s blog post. Yelp is not the only company that has struggled with its daily deals effort. Last month Facebook announced it would discontinue its daily deals offering, saying simply that it “learned a lot” by trying its hand at the group buying model.

Those who are bullish about daily deals say the industry has only become a victim of its own success — i.e., the  market has gotten too crowded too quickly — and that its best days are ahead. The departure of Facebook from the daily deals market and Yelp’s de-emphasizing of its deals efforts could be the start of a much-needed shakeout in the space that will let the true power players shine.

Is it a shakeout or just a lousy industry?

But it could also be argued that daily deals just don’t make financial sense. Even Groupon, the daily deals pioneer, has yet to turn a profit on its business, despite big top-line revenues. Startups often burn some cash initially as they focus on growth and invest in building out the company’s infrastructure — but if an established, profit-making firm such as Facebook can’t make a business work, there may be a problem with the model itself.

And even though some companies have walked away from group buying schemes, there are still a number of players out there who are poised to enter the daily deals space. A startup called Group Commerce provides Software-as-a-Service tools to let practically anyone launch their own daily deals product — and with $18 million in venture capital in the bank and fresh contracts with publishing giants such as the New York Times and Hearst Magazines, it’s just getting started. If the industry’s chief problem really is a glut of competition driving down margins, it may be a while before the daily deals industry sees real success.

Feature image of storm clouds courtesy of Flickr user PeterNijenhuis

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