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LivingSocial Gets $25M for Group Buying

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We know there are lot of entrants in the group deals space — see my recent piece, Groupon and the Wannabes — but now the competitors are seriously bulking up. LivingSocial — which has more than a million daily email subscribers — is today announcing it’s raised a $25 million Series B round led by U.S. Venture Partners and including Grotech Ventures and Revolution Capital, bringing the company to a total of about $35 million raised. That follows Groupon’s $30 million B round from Accel Partners and New Enterprise Associates announced in December.

Setting up group deals does require capital, because you need salespeople on the ground to find desirable venues and negotiate with them — and given the now tens of competitors in some cities, elbow out your rivals’ salespeople. LivingSocial is currently in 13 cities (it launches four more today), still quite a bit behind category leader Groupon, which is in 40. But armed with this new capital, LivingSocial CEO Tim O’Shaughnessy said the company hopes to rapidly expand its business.

O’Shaughnessy said LivingSocial’s angle, beyond deals, is to help small businesses grok social media in order to keep in touch with their customers. The Washington, D.C.-based company, which has been around for two and a half years with products like online book reviews and drink coupons, launched the deals product last summer. “We’re basically creating marketing budgets for people who never had marketing before,” he said. “There are not a lot of ways to guarantee customer foot traffic like we do.”

LivingSocial, which is not currently profitable as it expands (again, regret the incessant Groupon comparisons, but they say they have been turning a profit for a while), takes a 30-50 percent split of revenue collected from its deals, but it only pays out if its customers spend money, so there’s little financial risk for participating businesses. It primarily brings in customers through daily emails, but it also has an iPhone app with push notifications and a Facebook presence. O’Shaughnessy pushes off the competitive angle, saying many more merchants want to work with his company than they have space for, but says he’ll work to stand out from the crowd with the launch of an affiliate program today and soon launching more personalized subscriptions.

P.S. For those of you who are skeptical of group buying and competing in such a jam-packed space, I should say I’m a total believer. In the course of writing this article, I happily bought a half-off coupon for my neighborhood sushi joint, which happened to be LivingSocial’s San Francisco deal of the day. Speaking from personal experience, group deals totally spark spending and loyalty.

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10 Responses to “LivingSocial Gets $25M for Group Buying”

  1. I like it simply because as a user I really have nothing to loose but most to gain. I can see how margins will erode quickly so this will have to scale veyr fast and be an accepted utility where users don’t leave home without it so so speak

  2. Sundar Krishnamurthy

    This is a race to the bottom in terms of margins and profits.

    Assume the market leader, Groupon, keeps 50% of the price negotiated with the provider or vendor. It is very easy for a competitor to drop its margin so the vendor gets to keep more of the money. Vendors would also try multiple services to see what works and who lets them keep most of the money.

    To scale, these businesses will have to use call centers in India or other cheaper locations to source the deals, further removing them from the providers. This will also help lower selling costs but only for so long.

    Lack of barriers to entry will only accelerate this downward trend as more players enter the market. Very soon, there will be very little margin left.

    • You make an excellent point Sundar. Groupon’s prices seem way to high and if LivingSocial or another well funded competitor could undercut that 50%, the business owner would definitely be interested in earning more than 25%. However, the strength of Groupon is their ability to bring in tons of sales for their clients. I’ve seen promotions on there get nearly 20,000 sales in just one day. If a competing group buying site can catch up to them then it will all boil down to pricing. That is, of course, if Tippr doesn’t temporarily derail everything with their patents. Either way, the next few months should be interesting to watch and the competition will be good for everyone. I’m trying to keep track of all the new group buying sites that are launching every day. Many are just simple copies but a few have some other features that set them apart. I’ve created a list and comparison chart of these group buying sites here: The 50% cut that Groupon takes is pretty steep and the business owner usually ends up barely breaking even with this kind of promotion. The benefit is more of a long term investment to gain new customers and brand awareness. The competition should help to bring down that standard 50% share of the revenue generated per promotion as well as drive innovation. I’m trying to track all these group buying sites and identify any unique features that are developing out of this trend. You can find the rolling list and a comparison chart here:

  3. How are they going to scale with the team of salespeople touching local businesses? I think this is the beginning of recession business — when local businesses are willing to lower their prices to cover excess capacity. I don’t think they will be incentive to lower price after they have adjusted their cost structure.