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Groupon and Deal Sites See Skepticism Replacing Promise

 Monnee Tong, a 29-year-old librarian in San Diego, bought two deals from Groupon (GRPN) in the past year — one for teeth cleaning and one for eyelash extensions. Before she could even redeem the vouchers for either of them, Tong got refunds for both services. The problem? Awful customer service when she tried to book the appointments.

"Both places I spoke to made it seem like I was inconveniencing them for calling or emailing and asking for one," Tong said. The esthetician who offered the eyelash extension responded over email to an appointment request a couple of months ago, with a curt note saying she wasn't taking new clients until October.

"I am done with Groupon and any other organization like it," Tong said. "I would rather pay the money to get better service and be treated like an actual customer instead of a nuisance. It's not worth it."

Tong's sentiment reflects a broader disenchantment with deal sites like Groupon. Plenty of pundits have declared the daily deals craze come and gone. And speculation this week around whether Groupon CEO Andrew Mason may be on his way out -- talk that has been halted for now -- only fueled the doubts about the best-known name in the business.

Multiple Challenges

Groupon's name recognition aside, it's getting sizable competition for what appears to be a more and more difficult-to-please user base. Other deal sites include Living Social, Google Offers (GOOG), Amazon Local (AMZN), Bloomspot and Gilt City. In the past year, the number of daily deal sites in the U.S. rose by almost 8% (142 sites), according to Daily Deal Media, which tracks the industry. Meanwhile, globally, 560 daily deal sites closed over the same period.

U.S. growth is mostly coming from companies who are applying different business models to their deal offerings, says Boyan Josic, CEO of Daily Deal Media. "Wherever there is uncertainty, there lies opportunity. And there is no question that the deal industry is going through uncertain times," he said.

The overall business model itself is a key component of that uncertainty, if not skepticism in places, with some vendors complaining it's a bad deal for them.

In September, Raymond James surveyed merchants that used Groupon's daily deals services during the fall and found that 39% of them said they weren't likely to run another Groupon promotion over the next couple of years. A high commission rate and low rate of repeat customers gained through the promotion were the main reasons. The survey indicated that 66% of merchants were either "satisfied" or "very satisfied" with the number of new customers that a Groupon promotion brought in. But only 39% were satisfied or very satisfied with the quality of the customers -- that is, many businesses viewed these customers as lower spending and with lower repeat rates.  The survey also found that 32% of the businesses said they lost money on promotions offered, and 39% said the Groupon offer was less effective than other marketing tactics.

Indeed, growth has slowed in the core daily deals segment for Groupon, says Aaron Kessler, an analyst with Raymond James.  "Third-party" revenue (mostly deals offered by merchants through Groupon) declined nearly 16% to $423.6 million in the third quarter, from $502.9 million in the second quarter. Meanwhile, direct revenue -- from goods Groupon sells directly -- has increased.)

Groupon's stock recently traded at $4, more than 80% lower than where it began trading after its IPO last November. Shares enjoyed a brief bump recently following news that Tiger Global Management, an $8 billion hedge fund, took a 9.9% stake in the company. (Tiger Global also has stakes in Facebook (FB) and Yahoo! (YHOO), the publisher of this website.)

Seller Fatigue

Some consumers might see a 52% discount on dinner at a local Malaysian restaurant and wonder: How good can this place be if they need to slash prices so much to pull diners through the door?

In other words, extreme discounts leave consumers questioning the "long run value of the advertised product or service," wrote Rafi Mohammed, a pricing strategy consultant, in a Harvard Business Review article. They also make it less likely that customers return to the same merchant to pay full price, he said.

Mohammed also noted that drastic discounts attract the "wrong customers." Super-bargain hunters often decide to buy the rock-climbing class simply because of the low price and have no intention of coming back to pay full price. Indeed, in Raymond James' survey, 67% of merchants found that Groupon customers' spending habits are "lower" than their typical customers.

And for the all-important holiday shopping period, small businesses aren't pinning hopes of a sales boost on daily deal offerings. A Manta survey of small businesses cited in a USA Today article this week found that the majority (82%) of businesses have not, and will not, run promotions with Groupon or other daily deal sites this year. And just 3% of respondents said these types of promotion sites have brought them repeat business.

Branching Out

Perhaps aware that daily deals on yoga classes and laser-hair removal won't be its bread and butter much longer, Groupon is moving beyond the 40%-off-a-romantic-Italian-dinner-for-two type of offerings it's known for, and trying to become more of a traditional online marketplace. In its third-quarter earnings report, Groupon touted "rapid growth" in Groupon Goods, a retail marketplace selling things like toys, apparel, cameras and jewelry that was launched a year ago. Groupon subscribers have no doubt been noticing the email offers.

Last summer the company opened its first concept store in Singapore, and this month it opened one in Hong Kong. And in an attempt to get in on the holiday shopping frenzy, Groupon just launched its first holiday and toy catalogs, along with free shipping and free returns (when purchases meet certain restrictions).

LivingSocial's latest move signals a similar strategy. Last week the deals site -- and Groupon's main competitor -- began featuring items in its holiday gifts channel from e-commerce site Fab.com.

For now Groupon Goods is a more reliable revenue stream, and it's certainly a focus going into the holiday season. Yipit, a daily deal aggregator and research site, is expecting holiday deals for daily deal sites to reach $150 million in sales, compared with $20 million in sales in 2010. Groupon said the Goods channel notched $500 million in revenue shortly after its one-year anniversary.

"While the industry has grown from last year, there is quite a bit more of an emphasis on gifts this year," says Unaiz Kabani, data product manager at Yipit. "Groupon Goods has already become a major segment for the company, less than a year after it was launched," he says. "You'll definitely continue to see more of this."